Abstract
Blockchain networks have attracted tremendous attention for creating cryptocurrencies and decentralized economies built on peer-to-peer protocols. However, the complex nature of the dynamics and feedback mechanisms within these economic networks has rendered it difficult to reason about the growth and evolution of these networks. Hence, proper mathematical frameworks to model and analyze the behavior of blockchain-enabled networks are essential. To address this need, we establish a formal mathematical framework, based on dynamical systems, to model the core concepts in blockchain-enabled economies. Drawing on concepts from differential games, control engineering, and stochastic dynamical systems, this paper proposes a methodology to model, simulate, and engineer networked token economies. To illustrate our framework, a model of a generalized token economy is developed, where miners provide a commodity service to a platform in exchange for a cryptocurrency and users consume a service from the platform. We illustrate the dynamics of token economies by simulating and testing two different block reward strategies. We then conclude by outlining future research directions that will integrate additional methods from signal processing and control theory into the toolkit for designers of blockchain-enabled economic systems.
Highlights
During the 2007-2008 global financial crisis, serious abuses by major financial institutions initiated a series of events resulting in a collapse of the loosely regulated financial network
This crash unveiled major weaknesses of traditional financial systems and instigated a general feeling of distrust on banking institutions. In this context, decentralized economic systems based on cryptocurrencies, such as Bitcoin (Nakamoto 2008), were developed and launched by a group of cryptographic activists who believed in social change through censorship-resistant and privacy-enhancing technologies (Rainer et al 2015)
(2020) 5:19 financial institutions for their operation, these cryptocurrencies proposed a decentralized economy in which a collection of economic agents coordinate through a peer-to-peer network of computers via a blockchain protocol
Summary
During the 2007-2008 global financial crisis, serious abuses by major financial institutions initiated a series of events resulting in a collapse of the loosely regulated financial network. The paper is structured as follows: after providing appropriate background, we describe the LTE state-space model and analyze the behavior of the Bitcoin network using our framework. We present a model of a generalized token economy as an extension to the theoretical framework with a baseline simulation based on different open-loop block reward schedules.
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