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A Model of Cryptocurrencies

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  • Michael Sockin
  • Wei Xiong

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.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2020. "A Model of Cryptocurrencies," NBER Working Papers 26816, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26816
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    References listed on IDEAS

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    • G19 - Financial Economics - - General Financial Markets - - - Other

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