A Model of Cryptocurrencies

Michael Sockin () and Wei Xiong ()
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Michael Sockin: McCombs School of Business, University of Texas at Austin, Austin, Texas 78712
Wei Xiong: Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08544; School of Management and Economics, Chinese University of Hong Kong, Shenzhen, Guangdong 518172, China

Management Science, 2023, vol. 69, issue 11, 6684-6707

Abstract: We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitate transactions between users of certain goods or services. The network effect governing user participation, in conjunction with the nonneutrality of the token price, can cause the token market to break down. We show that token retradeability mitigates this risk of breakdown on younger platforms by harnessing user optimism but worsens this fragility when sentiment trading by speculators crowds out users. Elastic token issuance mitigates this fragility, but strategic attacks by miners exacerbate it because users’ anticipation of future losses depresses the token’s resale value.

Keywords: cryptocurrency; token price nonneutrality; optimism; platform fragility (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6684-6707

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