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A Model of Cryptocurrencies

Author

Listed:
  • 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)

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.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2023. "A Model of Cryptocurrencies," Management Science, INFORMS, vol. 69(11), pages 6684-6707, November.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6684-6707
    DOI: 10.1287/mnsc.2023.4756
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