A Model of Cryptocurrencies

Michael Sockin and Wei Xiong

No 26816, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility.

JEL-codes: G19 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-com, nep-mic, nep-ore and nep-pay
Note: AP CF IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Published as Michael Sockin & Wei Xiong, 2023. "A Model of Cryptocurrencies," Management Science, vol 69(11), pages 6684-6707.

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