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The Cost of Information in the Blockchain: A Discussion of Routledge and Zetlin-Jones

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  • Bruno Sultanum

Abstract

The volatility of crypto currencies hinders their ability to be media of exchange or stores of value, leading to the implementation of exchange-rate pegs in an attempt to stabilize these currencies. This strategy has been used by crypto currencies such as US Dollar Tether, Steem Backed Dollar and TrueUSD; and was previously adopted in countries such as Brazil, Mexico and Argentina. However, an exchangerate peg is vulnerable to speculative attacks if it is not 100% backed by reserves, as discussed in Obstfeld (1996). Using insights from the bank-run literature, Routledge and Zetlin-Jones (2018) build on Green and Lin (2003) and propose a model of speculative attacks. They show that adjustments to the exchange rate can prevent speculative attacks in equilibrium. They also show how to implement such contracts using blockchain technology. In this discussion paper, I provide a cautionary tale. I show also in a version of Green and Lin (2003) that the information content in the blockchain prevents agents from attaining all the gains from risk sharing— highlighting the downsides of too much public information.

Suggested Citation

  • Bruno Sultanum, 2021. "The Cost of Information in the Blockchain: A Discussion of Routledge and Zetlin-Jones," Working Paper 21-02, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:90439
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    References listed on IDEAS

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    1. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
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    4. Lin William Cong & Zhiguo He, 2019. "Blockchain Disruption and Smart Contracts," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1754-1797.
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    8. Bryan Routledge & Ariel Zetlin-Jones, 2018. "Currency Stability Using Blockchain Technology," 2018 Meeting Papers 1160, Society for Economic Dynamics.
    9. Renee Courtois Haltom & Bruno Sultanum, 2018. "Preventing Bank Runs," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue March.
    10. Cavalcanti, Ricardo de Oliveira & Bertolai, Jefferson Donizeti Pereira & Monteiro, P. K., 2011. "A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 722, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
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    Keywords

    Blockchain; Currencies; Information;
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