Research

Towards anonymous undercollateralized loans

Undercollateralized or unsecured loans are often considered impossible in a fully decentralized and permissionless setting due to lack of recourse for lenders in case borrowers default. In this paper, I consider the problem of anonymous lenders and borrowers that allows for the possibility of defaulting without any consequences from the borrowers. I study all possible strategies borrowers may use and show the conditions such that always-honest strategy dominates all subgames, i.e., Subgame Perfect Nash Equilibrium. This result may pave the way for experimenting with undercollateralized loans in fully decentralized settings, such as DeFi lending platforms that use public blockchain. Benefits of such a system include increasing liquidity provision and eliminating any source of biases against borrowers. 

Block size, miners discretion, and blockchain adoption

What is the secret of top cryptocurrencies? Why is Bitcoin number one? Despite the growing literature on blockchain, the dominance of Bitcoin is not well understood. Given that Bitcoin is the slowest blockchain with the most limited programmability, it is puzzling that it can remain at the top position after 15 years. In this paper, I study the trade-offs between choosing a larger block size and keeping the cost of blockchain node low.I show that small-block blockchains, although they offer lower speed and more expensive transactions, can be preferable because the cost of monitoring these blockchains is lower, inducing more node monitoring and thus making the blockchains more secure. This conclusion helps explain why Bitcoin can remain at the top despite all its limitations. Empirical tests support the hypothesis that small-block blockchains gain more trading volume and have higher market capitalization. The result offers several important empirical implications for blockchain developers, regulators, and users.

On the limiting distribution of Proof-of-Stake

Proof-of-Stake (PoS) is often promised to decentralize the blockchain security over Proof-of-Work (PoW) by allowing more people to join without specialized mining hardware. However, there is no consensus in the literature on PoS's centralization, with strong arguments from both sides. Furthermore, theoretical models of PoS often assume very strong conditions that cannot be justified in practice. I relax these assumptions and derive a more realistic model that takes into account trading activity and fees. My model shows that the limiting distribution can be centralized regardless of the initial distribution, reconciling conclusions in prior studies.