Research Pulse #63 05/02/22

  1. Debt-Financed Collateral and Stability Risks in the DeFi Ecosystem
    Authors: Michael Darlin and Leandros Tassiulas

The rise of Decentralized Finance (“DeFi") on the Ethereum blockchain has enabled the creation of lending platforms, which serve as marketplaces to lend and borrow digital currencies. We first categorize the activity of lending platforms within a standard regulatory framework. We then employ a novel grouping and classification algorithm to calculate the percentage of fund flows into DeFi lending platforms that can be attributed to debt created elsewhere in the system (“debt-financed collateral”). Based on our results, we conclude that the wide-spread use of stablecoins as debt-financed collateral increases financial stability risks in the DeFi ecosystem.


  1. Task management in decentralized autonomous organization
    Authors: Xi Zhao, Peilin Ai, Fujun Lai, Robert Luo, and Jose Benitez

In the emerging platform economy, blockchain technologies are reshaping the digital economy. Moreover, disintermediation and decentralization have broken new ground for platform organizations and management mechanisms and instigated the concept of a DAO (Decentralized Autonomous Organization). Recent literature on operations management has called for further research on governance issues related to DAOs. In response to this call, we explore the relationship between DAO management efforts and platform performance in this study. Specifically, we propose and theoretically articulate decentralized voting tasks in DAOs as a new form of organizing. Harnessing both online and on‐chain data from seven sources, we empirically examine how voting task division, task allocation, reward distribution, and information provision affect platform performance in the context of MakerDAO (an Ethereum‐based stablecoin issuance platform). Our findings reveal that strategic decisions arrived at through voting have a positive impact on platform operational performance under certain conditions, whereas operational decisions resulting from voting have a negative impact. Moreover, we elucidate the moderating effects of voting task execution characteristics on the relationship between completed decision tasks and operational performance. These findings have important implications from both theoretical and practical perspectives. We also share all the raw data we use to promote the development of blockchain‐related empirical research. We developed a flowchart to describe the process of DAO performing voting tasks. We found that strategic decisions via DAO voting have a positive impact on platform operational performance under certain conditions, whereas operational decisions resulting via DAO voting have a negative impact. We found that task allocation, reward distribution, and information provision moderate the relationship between DAO management efforts and platform operational performance.

Link: (PDF) Task management in decentralized autonomous organization

  1. On the role of stablecoins in cryptoasset pricing dynamics
    Author: Ladislav Kristoufek

We examine the interactions between stablecoins, Bitcoin, and a basket of altcoins to uncover whether stablecoins represent the investors’ demand for trading and investing into cryptoassets or rather play a role as boosting mechanisms during cryptomarkets price rallies. Using a set of instruments covering the standard cointegration framework as well as quantile-specifc and non-linear causality tests, we argue that stablecoins mostly reflect an increasing demand for investing in cryptoassets rather than serve as a boosting mechanism for periods of extreme appreciation. We further discuss some specifcities of 2017, even though the dynamic patterns remain very similar to the general behavior. Overall, we do not find support for claims about stablecoins being bubble boosters in the cryptoassets ecosystem.

Link: On the role of stablecoins in cryptoasset pricing dynamics - ProQuest

  1. The Danger of Small Anonymity Sets in Privacy-Preserving Payment Systems
    Authors: Christiane Kuhn, Aniket Kate, and Thorsten Strufe

Unlike suggested during their early years of existence, Bitcoin and similar cryptocurrencies in fact offer significantly less privacy as compared to traditional banking. A myriad of privacy-enhancing extensions to those cryptocurrencies as well as several clean-slate privacy-protecting cryptocurrencies have been proposed in turn.
To convey a better understanding of the protection of popular design decisions, we investigate expected anonymity set sizes in an initial simulation study. The large variation of expected transaction values yields soberingly small effective anonymity sets for protocols that leak transaction values. We hence examine the effect of preliminary, intuitive strategies for merging groups of payments into larger anonymity sets, for instance by choosing from pre-specified value classes. The results hold promise, as they indeed induce larger anonymity sets at comparatively low cost, depending on the corresponding strategy.


  1. Ethereum Smart Contract Analysis Tools: A Systematic Review
    Authors: Satpal Singh Kushwaha, Sandeep Joshi, Dilbag Singh, Manjit Kaur, and Heung-No Lee

Blockchain technology and its applications are gaining popularity day by day. It is a ground-breaking technology that allows users to communicate without the need of a trusted middleman. A smart contract (self-executable code) is deployed on the blockchain and auto executes due to a triggering condition. In a no-trust contracting environment, smart contracts can establish trust among parties. Terms and conditions embedded in smart contracts will be imposed immediately when specified criteria have been fulfilled. Due to this, the malicious assailants have a special interest in smart contracts. Blockchains are immutable means if some transaction is deployed or recorded on the blockchain, it becomes unalterable. Thus, smart contracts must be analyzed to ensure zero security vulnerabilities or flaws before deploying the same on the blockchain because a single vulnerability can lead to the loss of millions. For analyzing the security vulnerabilities of smart contracts, various analysis tools have been developed to create safe and secure smart contracts. This paper presents a systematic review on Ethereum smart contracts analysis tools. Initially, these tools are categorized into static and dynamic analysis tools. Thereafter, different sources code analysis techniques are studied such as taint analysis, symbolic execution, and fuzzing techniques. In total, 86 security analysis tools developed for Ethereum blockchain smart contract are analyzed regardless of tool type and analysis approach. Finally, the paper highlights some challenges and future recommendations in the field of Ethereum smart contracts.

Link: Ethereum Smart Contract Analysis Tools: A Systematic Review | IEEE Journals & Magazine | IEEE Xplore

  1. New optimization techniques for PlonK’s arithmetization
    Authors: Miguel Ambrona, Anne-Laure Schmitt, Raphael R. Toledo, and Danny Willems

PlonK is a universal and updatable zk-SNARK for general circuit satisfiability that allows a verifier to check the validity of a certain NP statement very efficiently, optionally in zero-knowledge. PlonK requires that the NP relation of interest be expressed as a system of so-called PlonK constraints. Such conversion is complex and can be implemented in various ways, having a great impact on the prover complexity (which is typically linearithmic in the number of PlonK constraints). We propose several general results for simplifying PlonK constraint systems, which produce more compact but equivalent systems and can lead to significant performance improvements. We also develop an automated optimizer of constraints, based on our techniques, that can be used to construct very compact and less error-prone constraint systems, favoring a more auditable circuit design. Finally, we demonstrate the potential of our techniques by implementing optimized constraint systems for the Poseidon hash, obtaining the most compact representations in the Turbo-PlonK model with minimal custom gates. En route, we devise a novel optimization idea for implementing Poseidon partial rounds and show that it can be applied to both simplifying SNARK circuits and achieving performance improvements in CPU implementations of the Poseidon hash.