Cryptoasset Market Structure and Concentration in the Presence of Network Effects
With Konstantinos Stylianou, Leonhard Spiegelberg, and Maurice Herlihy. Available on SSRN.
When network products and services become more valuable as their userbase grows (network effects), this tendency can become a major determinant of how they compete with each other in the market and how the market is structured. Network effects are traditionally linked to high market concentration, early-mover advantages, and entry barriers, and in the cryptoasset market they have been used as a valuation tool too. The recent resurgence of Bitcoin has been partly attributed to network effects too. We study the existence of network effects in six cryptoassets from their inception to obtain a high-level overview of the application of network effects in the cryptoasset market. We show that contrary to the usual implications of network effects, they do not serve to concentrate the cryptoasset market, nor do they accord any one cryptoasset a definitive competitive advantage, nor are they consistent enough to be reliable valuation tools. Therefore, while network effects do occur in cryptoasset networks, they are not a defining feature of the cryptoasset market as a whole.
Cryptodollars: The Story So Far
With Matt Walsh. Whitepaper published by Castle Island Ventures (July 2020) . Available at castleisland.vc.
This whitepaper covers the emergence of “cryptodollars” or stablecoins, and proposes a consistent definition and taxonomy of the phenomenon. We look at the growth of the phenomenon from virtually nothing in 2017 to over $11B in monetary base today. The paper attempts to explain why cryptodollars are having their moment today, why they are different from mere digital dollars, and whether they can retain their distinguishing traits long term. We analyse the relationship between large exchanges or ‘crypto banks’ and cryptodollars, proposing an interesting mutualistic connection. We compare the privately-issued cryptodollar phenomenon to historical free banking epochs to determine the similarities and a possible template for a way forward. Lastly, we chronicle the 28 cryptodollar projects with a capitalization over $1m and present a systematic review of the cryptodollar universe.
The Size of the Crypto Economy: Calculating Market Shares of Cryptoassets, Exchanges and Mining Pools
With Konstantinos Stylianou, University of Leeds, School of Law. Published in the Journal of Competition Law and Economics (June 2020). Available at OUP here. Preprint version on SSRN here.
As cryptoassets expand into mainstream economy, they invite heightened regulatory and investor scrutiny. A number of laws and regulations, such as antitrust (competition) laws and financial regulations, as well as investor decisions are informed by the relative economic size of cryptoassets, meaning that cryptoassets with larger market shares may become more attractive for regulation or investing. Properly measuring the economic footprint of cryptoassets, therefore, becomes imperative. However, the exercise has proven challenging for multiple reasons including unfamiliarity with the underlying technology and the role of involved actors, lack of understanding of the applicable metrics’ economic significance, and the unreliability of self-reported statistics, partly enabled by lack of regulation.
Acknowledging the centrality of cryptoasset measurements in a number of regulatory and policy-making areas, and the fact that previous attempts have been incomplete, simplistic, or even plainly wrong, this paper presents the first systematic examination of the economic footprint of cryptoassets and their constituent actors. We aim to achieve a number of objectives: to introduce, identify and organize all relevant and meaningful metrics of cryptoasset market share calculation; to develop associations between metrics, and to explain their meaning, application, and limitations so that it becomes obvious in which context metrics can be useful or not, and what the potential caveats are; and to present rich, curated, and vetted data to illustrate metrics and their use in measuring cryptoasset shares in their respective markets. The result is comprehensive guidance into the size of the crypto-economy and blockchain networks.
Cryptoasset Valuation, Theory and Practice
Chapter in ‘Cryptoassets: Legal, Regulatory, and Monetary Perspectives,’ ed. Chris Brummer [link]
Oxford University Press, 2019
This chapter reviews practitioner and academic work on the topic of cryptoasset valuation, introduces a value-driven taxonomy of cryptoassets, and investigates several assets directly to demonstrate how they might be valued. The ease of creating a token and an upswing of global retail enthusiasm inaugurated a token sale boom in 2017 that eclipsed venture funding for start-ups within the industry. A maturing data environment and the innate transparency of blockchains has led to more sophistication in the analysis of these economic systems; but widely agreed-upon valuation methodologies still do not exist. It has been suggested that cryptoassets such as bitcoin cannot be valued, only priced. Practitioners would do well to cross the aisle and work with their academic counterparts on deriving meaningful models for these assets; equally, academia should continue to grant cryptoassets the attention they deserve.
A Cross-Sectional Overview of Cryptoasset Governance and Implications for Investors
Master’s thesis for the University of Edinburgh, MSc Finance & Investment, distinction awarded.
Available online here.
Cryptocurrencies and their conceptual cousins – tokenized networks – represent a growing and still largely unregulated asset class. These draw upon the principles of free open source development and inherit governance structures from them, while introducing protocol-level economic incentives. This paper describes and analyzes governance models in these projects. This empirical study of fifty tokenized networks finds that governance structures are largely informal, obscure to investors, and characterized by the concentration of decision-making and funding. Innovations such as Proof of Stake, masternodes, and protocol-level tokenholder governance grant investors some governance rights, yet reliable implementations have not yet emerged. While decentralization is a stated goal of many of these projects, political governance in practice is highly centralized. This represents an overlooked risk factor for investors in this novel asset class.