Table of Links Abstract and 1. Introduction Abstract and 1. Introduction 2 Methodology 2 Methodology 3 Hardware 3 Hardware 4 Software 4 Software 5 Network 5 Network 6 Consensus 6 Consensus 7 Cryptocurrency Economics 7 Cryptocurrency Economics 8 Client API 8 Client API 9 Governance 9 Governance 10 Geography 10 Geography 11 Case Studies 11 Case Studies 12 Discussion and References 12 Discussion and References A. Decentralization and Policymaking A. Decentralization and Policymaking B. Software Testing B. Software Testing C. Brief Evaluations per Layer C. Brief Evaluations per Layer D. Measuring decentralization D. Measuring decentralization E. Fault Tolerance and Decentralization E. Fault Tolerance and Decentralization 7 Cryptocurrency Economics A core component of ledger systems is their native token. Tokens compensate system maintenance and accommodate value transfers. They are treated as currency or assets by their users, thus forming a market economy. To record data on the ledger, e.g., payments or interactions with applications, users obtain tokens to pay the corresponding fees. System maintainers get compensated in tokens to offset their costs. Several studies have considered the distribution of tokens and their availability (e.g., on exchanges) as integral parts of a blockchain and its eventual degree of decentralization [157,42,153,129]. Accordingly, in this section, we explore decentralization in blockchain-based economies, in terms of initial token distribution, token ownership, and secondary markets. Initial Token Distribution. To bootstrap the system, a blockchain protocol defines two parameters: i) the distribution of tokens at the system’s launch, and ii) how new tokens are generated and distributed as the system evolves. Thus, the generated tokens form the resource of interest, while the relevant parties are the token holders. Initial Token Distribution. Initial Token Distribution. As with other aspects, Bitcoin led the way and other systems explored alternatives. In Bitcoin, no coins existed prior to its beginning, i.e., there was no “pre-mine.” Starting from genesis, each block creates a predetermined amount of coins, based on a rate that converges to 21 million tokens in existence [131]. New coins, along with transaction fees, are awarded to the miner that produces each block. Therefore, to acquire new tokens a user gathers enough computing power to produce a block. In other blockchain systems, some tokens were sold via traditional markets before the blockchain was deployed. This approach, termed “Initial Coin Offering” (ICO), enabled funding the project with the future proceeds of the token investment. In return, investors acquired a pre-launch amount of tokens, which was codified in the chain’s first block. In terms of token generation, most systems employ a variation of Bitcoin’s mechanism, e.g., Ethereum blocks yield 2 new tokens, while others, like Cardano, employ elaborate mechanisms to incentivize pooling around a target number of pools [28]. The initial token distribution is particularly important in PoS systems, where Sybil resilience relies on it (cf. Section 6). If centralized around a few parties, e.g., via pre-mining (or “pre-minting”), early investors have to maintain the system in its early stages, while also receiving the early blocks’ rewards. Fewer consensus participants during this time lowers the threshold for adversarial takeover, threatening the system’s safety and liveness. In both PoW and PoS systems, new users are onboarded if early investors sell tokens on secondary markets. Consequently, early investors control the system’s expansion and valuation, impacting its stability. stability Finally, the process of distributing tokens might be elemental for privacy-oriented systems. Typically, such projects employ zero-knowledge protocols that rely on a secure construction of a common reference string (CRS). If the CRS’s construction is centralized, then the party that creates it can deanonymize all transactions or violate their correctness. To avoid such hazards, various ceremony protocols have been proposed in order to construct the CRS in a distributed manner [141,103,136,110]. Token Ownership. Diverse token ownership plays a central role in the usability and security of a blockchain. Hence, the system’s circulating tokens are the resource of interest, while the relevant parties are: i) key managers, and ii) legal asset owners. This distinction arises due to the existence of custodians, who control assets on behalf of other stakeholders, and users controlling multiple addresses. Token Ownership. Token Ownership. If most tokens are owned by a few parties, many hazards arise. First, PoS systems’ security, i.e., safety and liveness, relies directly on diverse token ownership, which makes corrupting enough parties to control a majority of tokens more threatening. Second, the token’s price may be manipulated, posing a risk on the system’s stability and, indirectly, security, in both PoS and PoW systems. Specifically, participation cost, e.g., for mining equipment or electricity, is denominated in fiat currency. However, miner income from block rewards comes in tokens. Thus, miners need to sell part of the rewards (for fiat) to pay for their operational costs. If the market is volatile, profitability is more precarious and miners are possibly less inclined to participate, which can impact the safety or liveness of the system by reducing the threshold for conducting a 51% attack. Various factors drive token ownership centralization. Initial tokens are often allocated centrally (see above). System incentives, e.g., fixed token supply, generally favor hoarding tokens instead of spending them. Finally, rich participants may accumulate capital faster than small ones, an inevitability in pseudonymous systems where downwards wealth redistribution is impossible [99]. Secondary Markets. Distributing the tokens to a wide population is predominantly made on secondary markets. The rate of token production is typically slow, depending on block production, and the new tokens are often distributed to existing users. Therefore, new users are onboarded via centralized exchanges and, to a lesser extent, face-to-face transactions. The tokens that are bought and sold through these markets constitute the resource of interest, when it comes to measuring the decentralization of secondary markets, while the relevant parties are i) the assets for which they are bought and sold (“trading pairs”),[12], and ii) the exchanges that host these trades. Secondary Markets. Secondary Markets. Many hazards arise when tokens are available on limited markets. First, exchanges offer little privacy guarantees, so their operators have full access of user data, following KYC regulations. Second, exchanges are largely unregulated by financial authorities and may engage in market manipulation. Third, few marketplaces often result in lower liquidity. Thus, the threshold for manipulating the token’s price by some percentage, via selling or buying tokens, also lowers. Similarly, if most of the token’s liquidity is allocated to a few trading pairs, then it becomes exposed to the problems of the tokens at the other end of the pairs (e.g., the collapse of one of these systems might trigger a huge liquidity loss). All such events threaten the system’s stability, while also, when mining profitability drops due to the token’s devaluation, safety and liveness are indirectly hurt. Authors:
(1) Christina Ovezik, University of Edinburgh (c.ovezik@ed.ac.uk);
(2) Dimitris Karakostas, University of Edinburgh (dkarakos@ed.ac.uk);
(3) Aggelos Kiayias, University of Edinburgh and IOG (akiayias@ed.ac.uk). Authors: Authors: (1) Christina Ovezik, University of Edinburgh (c.ovezik@ed.ac.uk); (2) Dimitris Karakostas, University of Edinburgh (dkarakos@ed.ac.uk); (3) Aggelos Kiayias, University of Edinburgh and IOG (akiayias@ed.ac.uk). This paper is available on arxiv under CC BY 4.0 DEED license. This paper is available on arxiv under CC BY 4.0 DEED license. available on arxiv available on arxiv [12] In our context the liquidity of a trading pair is measured across all exchanges.

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Cryptocurrency Economics: Token Distribution, Ownership, and Market Decentralization

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