I am glad to present this issue of the CBT Discussion Paper Series. We have a content-rich edition with four contributions spanning across some of the main ‘hot’ topics in the blockchain and decentralized finance domain: the governance in Defi; central bank digital cash; stablecoins and a mechanism for blockchain consensus based on identity.
Advances in any of these topics will have dramatic repercussions on the entire digital economy domain. I find a sign of good health that researchers are attacking these challenges from all perspectives, and I am pleased to read convergences and divergences in the proposed approaches. We live in a complex world and technology is not simplifying it. Rather, it is empowering the system’s dynamics enhancing such complexity to higher levels. For a long time, we have witnessed academics and technologists producing self-emphatic essays on the magnificent and progressive effects of new technologies on society. There was indeed a need for this, to promote change. Now we start witnessing the production of more mature reflections on fundamental unsolved problems that technology has exasperated. Indeed, we still need to master the delicate balance between authoritarian and democratic governance in all systems and – even more – in Defi. Stablecoins are great tools, but what about the inescapable mechanism underneath supply, demand, and price discovery? And eventually, who protects our personal data from human greed and madness? I am sure readers will find this issue insightful and thought-provoking.

Tomaso Aste
UCL CBT Scientific Director & Chairman of the Editorial Board

Governance in Decentralized Autonomous Organizations
Alexander Braun, Niklas Haeusle, Stephan Karpischek

ABSTRACT: We develop a model of decentralized autonomous organizations and examine when these new institutional arrangements are both incentive compatible and collusion proof. Incentive compatibility can be achieved through a staking mechanism. Participants are required to post stakes, a digital form of collateral that carries voting rights. Additional effort must be spurred by higher stakes, which increase the risk of collusion. To be inherently collusion proof, DAOs either require a high revenue or a sufficient degree of decentralization in combination with a large network size. If neither one of these conditions is fulfilled, collusion can be precluded by governing the DAO with stochastic voting and having voting power concentrated among a few key token holders.

Central Bank Digital Cash: A Credible Commitment to Privacy
Ian Grigg

ABSTRACT: Central Banks are committing themselves to issue digital cash to retail or end-user customers. In so doing, they face a number of contradictions in their goals. Imposing AML, promoting financial inclusion, and not upsetting term transformation pose challenges. Riding above these challenges is the paradox of privacy: users will only respect digital cash if it is private and they feel safe in their use. This same privacy ensures that the bounty of transaction data will be a prize of great value, to be enjoyed in the breach by a host of enemies. If Central Banks do not preserve the privacy of users’ transactions, they will not adopt. As there is no easy or stable balance in privacy in such a dynamic and complex system, this is an undecidable problem, and so Central Banks must take the users’ side. To ensure success, I propose that Central Banks must provide a credible commitment to privacy, else see their designs rejected by a sceptical public.

Stablecoin Regulation: EU, UK and US Perspectives
Pierre Ostercamp

ABSTRACT: Recent EU, UK and US proposals for stablecoin regulation are all based on existing banking, e-money and payments regulations to varying degrees. However, there are limits to applying existing financial regulation to stablecoins due to their unique technological characteristics. As such, this paper argues that the regulation of stablecoins should follow the principle of ‘same risk, same regulatory outcome’, where stablecoin activities posing the same risks as currently regulated activities could be subject to amended regulatory requirements as long as the same regulatory outcomes are achieved. This paper outlines and compares the EU, UK and US proposals, highlights the limits of applying existing financial regulation to stablecoins, and proposes arguments for how stablecoins should be regulated. This paper argues that centralised stablecoin issuers should be subject to strict requirements on the investment and management of reserve assets in addition to liquidity and capital buffers to ensure redemptions can always be met. Under these and other requirements such as segregation and safeguarding requirements, bank-like deposit protection would not be needed. This paper disagrees with the approach proposed in the US of regulating stablecoins like bank deposits given that equivalent protections to deposit insurance can be achieved through other means, and stablecoins are generally treated as a means of payment but not a means of saving.

The proof of identity
Andrea Dalla Val

ABSTRACT: Despite the recent development of a number of decentralised applications, blockchain technology is still lacking of proper fundamentals as currently used consensus protocols are poorly achieving the original goals at the base of its inception. In fact, Proof of Work is dependent on high amounts of electricity supply thus easily censorable, and Proof of Stake is undemocratic as one does not count one, and thus does not have a great appeal to small holders. The inspiration of this white paper comes from Prof. Bryan Ford and the EPFL, and their idea of proof of personhood which places individuals as the base of the minting system and creates the idea of pseudonymous parties; however, here we introduce the proof of identity which eliminates the need of multiple attendances to pseudonymous parties and creates a permanent proof. Another notable paper introducing the use of biometric identification, was proposed by Mohammad Javad Hajialikhani, Mohammad Mahdi Jahanara June 2018, Cornell University, however the proposed design relies on Ethereum blockchain, and P2P identification, in this paper instead, the methodology is based on identification parties, and additional verification parties randomly organised by a decentralised AI engine. The Proof of Identity network is truly decentralised and democratic because based on a multitude of individuals, it is structured as income generator as opposed to an investment scheme, is non-quantitative, i.e. able to validate all blocks of all blockchains without significant additional efforts. The protocol is based on humanity parties that are fully managed by an AI engine stored in the blockchain (cohort leader servers). Humanity parties are complying with standards that ensure: ‘’everyone or no one is cheating’’ i.e. there cannot be cheaters and honest participants attending the same party; parties are automatically formed and managed, no authority or entity has any power or discretion over them, parties venues are locked and tamper sealed; ‘’everyone or no one is cheating’’ is the foundation of a pyramid validation structure which ultimately requires cheaters to collude globally to avoid being discovered. The Proof of Identity network is permanently censorship resilient because based on the principles that attackers cannot possibly fake identities, established minters are unaffected by governmental bans, it is the democratic choice of a multitude of identified individuals, all prerogatives missed by the currently used proofs. Under these premises, any open source blockchain can be effortlessly validated and even forcibly (i.e. without any involvement of miners) hard forked into a duplicate network run under the PoID. Imagine the slogan: ‘’Bitcoin is hard forking into a 0 energy consumption network’’!

Energy Footprint of Blockchain Consensus Mechanisms Beyond Proof-of-Work
Moritz Platt, Johannes Sedlmeir, Daniel Platt, Jiahua Xu, Paolo Tasca, Nikhil Vadgama, Juan Ignacio Ibañez,

ABSTRACT: Popular distributed ledger technology (DLT) systems using proof-of-work (PoW) for Sybil attack resistance have extreme energy requirements, drawing stern criticism from academia, businesses, and the media. DLT systems building on alternative consensus mechanisms, foremost proof-of-stake (PoS), aim to address this downside. In this paper, we take a first step towards comparing the energy requirements of such systems to understand whether they achieve this goal equally well. While multiple studies have been undertaken that analyze the energy demands of individual Blockchains, little comparative work has been done. We approach this research question by formalizing a basic consumption model for PoS blockchains. Applying this model to six archetypal blockchains generates three main findings: First, we confirm the concerns around the energy footprint of PoW by showing that Bitcoin’s energy consumption exceeds the energy consumption of all PoS-based systems analyzed by at least three orders of magnitude. Second, we illustrate that there are significant differences in energy consumption among the PoSbased systems analyzed, with permissionless systems having an overall larger energy footprint. Third, we point out that the type of hardware that validators use has a considerable impact on whether PoS blockchains’ energy consumption is comparable with or considerably larger than that of centralized, non-DLT systems.

With this issue, we encourage the debate on Central Bank Digital Currency (CBDC).

CBDC will arrive soon. This is simply an unavoidable consequence of technology and will either follow innovation needs from central bankers or citizen demand for easier payments tools.

The introduction of CBDC has huge implications that go well beyond a change of support in circulating cash from paper/metal to crypto codes. Indeed, it opens a vast domain of possibilities that central banks and governments are both keen to explore and scared by the consequences.

In the present environment, central banks are struggling to find a hedge on which to operate. Remarkably, the cornerstones of the central banking mantra, namely the relation between interest rates and inflation, and the effects of quantitative easing on the currency value, have been proved unsubstantiated by facts. There is therefore a strong need to rethink the means of central bank interventions. CBDC provides a possibility for a direct link between central bank emission and citizen spending ability. This is a new
monetary policy instrument that could be a game-changer. Furthermore, to some governments, the perspective of having an ultimate means of state control on citizen’s behavior is too appealing to be ignored. For the same reason, for many citizens, the perspective of being obliged to use government traceable means of payments is unacceptable. Tolls to make digital currencies untraceable are readily available; however, the fear that this will be a huge gift to criminals is well-founded. Technology is neutral, it both creates the problem and offers the solution. Conversely, the application of technology is not neutral and the way we design CBDC now will impact our future for many years to come.

Enjoy your reading!

Tomaso Aste
UCL CBT Scientific Director & Chairman of the Editorial Board

Central Bank Digital Currencies and the GDPR: Reconciling blockchains with the right to be forgotten
Pierre Ostercamp

ABSTRACT: Using a blockchain to issue a central bank digital currency (CBDC) may yield benefits such as immutability (tamper resistance), enhanced security of data storage, and efficiency gains. However, the immutability of blockchains conflicts with the principles and rights of the EU’s General Data Protection Regulation (GDPR); in particular, the right to erasure (‘right to be forgotten’). For a blockchain-based CBDC not to breach the right to be forgotten, one of two conditions must be fulfilled: all personal data recorded on the blockchain must either be a) stored or manipulated in a way that brings it outside of the GDPR’s scope; or b) erased or sufficiently obfuscated when a data subject exercises their right to be forgotten.

Will Central Bank Digital Currencies (CBDC’s) Eliminate the Need for Cryptocurrencies?
Kelly Ann Coulter

ABSTRACT: As of February 2021 there were 4,501 crypto coins on the market (Best 2021). In response to the explosion of blockchain development, The Bank of England are considering the introduction of a Central Bank Digital Currency (CBDC) (Bank of England 2021a). This would give the central bank the ability to build on their traditional centralised role in the economy, ensuring stability by providing certainty and liquidity in the financial system, as the UK’s monetary and fiscal policy manager. This paper is sectioned into three parts addressing the question: Will a CBDC eliminate the need for cryptocurrency? The historical and contemporary role of the Bank of England is considered, crypto coins and CBDC are assessed against their competencies, and finally a comparison between the capability of crypto coins and a CBDC, comprises of an evaluation to whether either can meet the Bank of England’s policy objectives. This paper finds that, if crypto assets become progressively governed by regulation through incorporation into existing and developing legal frameworks (Ferreira 2021; Agnikhotram and Kouroutakis 2018; Bank of England 2021a; Department of Treasury 2021), far from being exclusive assets, both a CBDC and crypto-assets present a range of potential opportunities to contribute to a host of financial instruments, that can operate in an interoperable, inclusive FinTech sector. This will result in supporting an open, competitive, and free market, ultimately benefitting end users in an increasingly globalised financial system.

Regulating Financial Innovation: DLT Potential and Promise for Financial Market Infrastructures (FMIs)
Pavel Kulikov

ABSTRACT: The current worldwide banking and financial markets regulation updates are widely seen as an important milestone in the evolution of global financial stability and market confidence in a move forward to re-establish full global banking and efficient financial market functioning. Technology plays a unique role in this regulatory transformation becoming more and more observed in various spheres of increasingly digitized financial markets. It is seen more and more in everyday banking, central bank settlements, clearing and settlement of assets, trade of derivatives and many other fields. A persistent theme of this paper is the currently changing approaches to regulation of technological risks following a rapid transition to the wholesale level leveraging and mass-adoption of technologies on financial markets. Following an introduction to emerging technologies on the financial market, this paper looks at various factors behind currently changing regulatory paradigm, as well as blockchain’s structure and promise for Financial Market Infrastructures (FMIs), including new and alternative settlement models which become available on DLT.

It is, as usual, my great pleasure to present the selection of papers for the last quarter of 2020. Here, we are reporting three interesting papers concerning market concentration, network effects, and bookkeeping in the cryptocurrency world. This selection of papers aims to help authors to increase their impact on both academia and industry and provides CBT associates a glimpse of some of the research activities in our vast and productive community.

Enjoy your reading!

Tomaso Aste
UCL CBT Scientific Director & Chairman of the Editorial Board

Cryptoasset Competition and Market Concentration in the Presence of Network Effects
Konstantinos Stylianou, Leonhard Spiegelberg, Maurice Herlihy and Nic Carter

ABSTRACT: 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 (yet) a defining feature of the cryptoasset market as a whole.

Blockchain Hash, the Missing Axis of the Accounts to Settle the Triple Entry Bookkeeping System
Alessio Faccia, Narcisa Roxana Moşteanu and Luigi Pio Leonardo Cavaliere

ABSTRACT: The bookkeeping accounting method recognized all over the world is based on the so-called double entry, with which in each account (defined T-Account for its shape) there are two sections, Debit and Credit. These two sections take on different meanings depending on the nature of each account. The double entry is an exceptional consolidated accounting method that dates back to the fifteenth century, however it has highlighted limits in terms of auditing. The single entry did not take into account the cross relations between the accounts, reporting only on the journal. The double entry has overcome this limit by introducing the ledger, but a cross-check of the mirrored transactions recorded by the other companies is still missing. The introduction of blockchain technology could now offer a new opportunity to ensure further auditing control. The transition from double entry to triple entry is therefore only a matter of time. The blockchain itself is borrowing the word “ledger” from accounting and now it is time for accounting to introduce a third leg (another axis) to the T-Accounts, that can be turned into a new X-shaped version of accounts. This third axis can be used to include the unique identifier of each transaction represented by the Hash.

Network Effects and Market Concentration for Blockchain-based Decentralized Assets
Olaoluwa Samuel-Biyi

ABSTRACT: Network effects exist when the value of a product increases as the number of users increase. For network sponsors, strong positive network effects result in market concentration and increase their market power. These effects also exist for decentralized networks such as the network for blockchain-based digital assets; however, in these markets, there are no centralized sponsors and market power is distributed in the hands of the participants. For decentralized digital assets, network effects are unlikely to result in a winner-take-all outcome, and multiple digital assets can remain viable in the long-run. These markets also prevents rent-seeking and are inherently more efficient.

It is with great pleasure to present this new edition of our discussion paper series, the fourth so far and third of this year.
This time we publish four papers in the print edition and further two are available online only.
We received excellent submissions, and the choice between the print edition and online publication has been challenging, and all the papers deserve significant attention.
We hope our publication of these papers will provide a publicity boost that will increase their impact. These papers cover extremely ‘hot’ and important topics from technology governance, to taxes and adoption. These are all topics at the centre of the UCL CBT’s research activities
that we support.

Enjoy your reading!

Tomaso Aste
UCL CBT Scientific Director & Chairman of the Editorial Board

An Analysis of Blockchain Adoption in Supply Chains Between 2010 and 2020
Nikhil Vadgama, Paolo Tasca

ABSTRACT: In this research, the evolution of Distributed Ledger Technology (DLT) in supply chains has been mapped from the inception of the technology until June 2020, utilising primarily public data sources. Two hundred seventy-one blockchain projects operating in the supply chain have been analysed on parameters such as their inception dates, types of blockchain, stages reached, sectors applied to and type of organisation that founded the project. We confirm generally understood trends in the blockchain market with the creation of projects following the general hype and funding levels in the industry. We observe most activity in the Agriculture/Grocery sector and the Freight/Logistics sector. We see the shift of market interest from primarily private companies (startups) to public companies and consortia and the change in blockchain adoption from Ethereum to Hyperledger. Finally, we observe higher success and lower failure rates for Hyperledger-based projects in comparison to Ethereum-based projects.

Resource-Aware Session Types for Digital Contracts
Ankush Das, Stephanie Balzer, Jan Hoffmann, Frank Pfenning, Ishani Santurkar

ABSTRACT: Programming digital contracts comes with unique challenges, which include (i) expressing and enforcing protocols of interaction, (ii) controlling resource usage, and (iii) preventing the duplication or deletion of a contract’s assets. This article presents the design and type-theoretic foundation of Nomos, a programming language for digital contracts that addresses these challenges. To express and enforce protocols, Nomos is based on shared binary session types. To control resource usage, Nomos employs automatic amortized resource analysis. To prevent the duplication or deletion of assets, Nomos uses a linear type system. A monad integrates the effectful session-typed language with a general-purpose functional language. Nomos’ prototype implementation features linear-time type checking and efficient type reconstruction that includes automatic inference of resource bounds via off-the-shelf linear optimization. The effectiveness of the language is evaluated with case studies about implementing common smart contracts such as auctions, elections, and currencies. Nomos is completely formalized, including the type system, a cost semantics, and a transactional semantics to instantiate Nomos contracts on a blockchain. The type soundness proof ensures that protocols are followed at run-time and that types establish sound upper bounds on the resource consumption, ruling out re-entrancy attacks and out-of-gas vulnerabilities.

Legal Regulation of Virtual Currencies: Illicit Activities and Current Developments in the realm of Payment Systems
Ilias Ioannou

ABSTRACT: Since Bitcoin was invented a decade ago, the phenomenon of Virtual Currencies has been hailed as an ingenious innovation and decried as the preferred transaction vehicle for illicit actors. Despite the numerous headlines discussing the virtues and vices of virtual currencies, heretofore there has been no comprehensive legal response. Regulators seem to contemplate the wrong question; they wonder whether they should regulate virtual currencies instead of how to regulate them.

The present contribution elaborates on the second question. Starting with a conceptual analysis of virtual currencies and their promising potential, it identifies the financial crime risks posed by the intersection between legitimate and illegitimate users. The research shows that a fragmentary regulation would be ineffective; this promising technology will either be integrated into the lawful economy or it will be exploited by criminals. The paper attempts to fill the regulatory gap by providing a recommendation for the embeddedness of Virtual Currencies into the EU financial system. It achieves that by redirecting regulation towards the uniqueness of their underlying technology.

Bitcoin Governance as a Decentralized Financial Market Infrastructure
Hossein Nabilou

ABSTRACT: Since Bitcoin was invented a decade ago, the phenomenon of Virtual Currencies has been hailed as an ingenious innovation and decried as the preferred transaction vehicle for illicit actors. Despite the numerous headlines discussing the virtues and vices of virtual currencies, heretofore there has been no comprehensive legal response. Regulators seem to contemplate the wrong question; they wonder whether they should regulate virtual currencies instead of how to regulate them.

The present contribution elaborates on the second question. Starting with a conceptual analysis of virtual currencies and their promising potential, it identifies the financial crime risks posed by the intersection between legitimate and illegitimate users. The research shows that a fragmentary regulation would be ineffective; this promising technology will either be integrated into the lawful economy or it will be exploited by criminals. The paper attempts to fill the regulatory gap by providing a recommendation for the embeddedness of Virtual Currencies into the EU financial system. It achieves that by redirecting regulation towards the uniqueness of their underlying technology.

Asset-Backed Tokens of Guarantees of Origin from renewable energy sources
Dimitrios Koutsoupakis

Available online only and not in the print edition here.

ABSTRACT: With a focus on the guarantees of origin certificates market, we describe the financial aspects of originating Asset-Backed Tokens in efectively mobilizing funds to sustainable infrastructure investments. As economic disintermediation challenges energy regulation, it is of great significance to propose a blockchain-based market design whereby savings kept in decentralized e-wallets can be directly linked to energy consumption from renewable sources via IOU cryptocurrencies while producers raise capital at lower cost. These ABTs resemble to perpetual zero-coupon bonds issued below par. Yet, they are convertible to liquid money due to an embedded American put (soft) option readily settle originator’s energy bills at a discount compared to the economy’s functional (traditional fiat) currency.

Applying Blockchain Technology to Cross-Border Tax Reporting
Kellen Yent

Available online only and not in the print edition here.

ABSTRACT: Current reporting schemes for cross-border taxation are not completely fraud proof. Both the OECD’s Common Reporting Standards (CRS) and the US’s Foreign Account Tax Compliance Act (FATCA) allow tax evaders to hold assets aboard outright untaxed, or further allow for participation in schemes that can lead to tax manipulation, such as citizenship or residency by investment schemes (CBI/RBI). Besides closing these loopholes in the legislation, this paper proposes a blockchain solution. The proposed blockchain model will be derived from an existing blockchain solution to VAT fraud proposed by Ainsworth, Alwohaibi, and Cheetham. The blockchain specifically envisioned for tax reporting in this paper would be permissioned and controlled by a central authority, in order to regulate access. Zero knowledge proofs (ZKP) would be utilised to keep computational space and data private between jurisdictions participating on the shared distributed ledger. This blockchain solution could not only bring tax reporting into real time while increasing tax collection and transparency, but also automate a fairly complicated and bureaucratic process. However, implementation of such a process is costly and should be weighed against each jurisdiction’s national policy needs. Moreover, such a solution is not practical unless tax reporting is fully digitalised. A blockchain solution may have varied results on horizontal equity conditions within a nation, but it will not increase vertical equity. Finally, sovereignty is one major issue this paper is highly aware of when proposing a global solution to tax reporting. Because of ZKP and the fact that jurisdictions can opt-in, this paper does not foresee a diminishing of any jurisdiction’s national sovereignty.

Here we are with the second run of our discussion papers series. This time we decided to have it focused on something that has affected all our lives in recent months: COVID-19. We are all conscious that blockchain could offer solutions to a large range of issues in this environment, from secure tracking to anonymization solutions.

In this series issue, we report one paper addressing smart contracts and how to devise tolls within the blockchain environment to make them flexible and adaptable to black swan events. We all recognize that the interface between technology, law and society must be soft and adaptable, however technology is excellent in the precision of execution, less so in flexibility and interpretation. We believe this paper by Niall Roche and Alastair Moore is an excellent contribution to progressing the debate in a direction that we encourage many to explore.

Interestingly, the peak of the COVID-19 pandemic has seen little adoption of innovative approaches and new technologies with a strong reliance on poor performing but consolidated methodologies. At the same time, the lockdown has given a chance to individuals to deepen their understanding of new topics and has created a new technology-enabled space for the community to come together with innovation. Now, it is the time when this underground work is emerging with ideas and solutions that will pave our way ahead.

Enjoy your reading!

Tomaso Aste
UCL CBT Scientific Director & Chairman of the Editorial Boar

Oraclised Data Schemas: Improving contractual certainty in uncertain times
Niall Roche  & Alastair P Moore

ABSTRACT: The rapid spread of the COVID-19 pandemic and the resulting government restrictions to individuals and selected business sectors has caused unprecedented interruptions and uncertainty. The scale of this disruption is manifest in the changes in GDP figures. According to the Office of National Statistics[23], the UK GDP fell by 20.4% in April 2020, which is in line with the predictions of the OECD for advanced economies. The OECD predicted the overall direct initial hit in many major advanced  economies’ GDP to be between 20-25% [3]. This has had serious financial consequences not only for the affected sectors, but also the firms that insure and underwrite different types of economic activity.

Furthermore, as current restrictions are lifted in response to reduced infection risks and changing policy, there is a need for parties to be able to enter into agreements where the trading environment may be subject to rapid change. If a sector is restricted again in response to changing infection rates, it may be necessary for contracts to explicitly deal with temporal conditions that are applicable at local or regional level. Examples might include a commercial lease based on turnover or a service level agreement based on supply of goods restricted by closing a manufacturing facility.

In this paper, we set out an approach to adaptable contract clauses based on different data sources. Our approach uses i) an oracle to serve data from designated sources relating to COVID-19 and the trading restrictions that are in force ii) a schema to represent the data structures and a methods for parsing the data, and iii) a legal lexicon for integration into smart contracts. In combination, these can be used to develop dynamic legal agreements that can adapt to black swan events such as pandemic and a range of dynamic regulatory restrictions. This paper presents details of our implementation of an oricalised data schema and discusses future developments of the system.

A percolation model for the emergence of the Bitcoin Lightning Network
Silvia Bartolucci, Fabio Caccioli & Pierpaolo Vivo

ABSTRACT: The Lightning Network is a so-called second-layer technology built on top of the Bitcoin blockchain to provide “off-chain” fast payment channels between users, which means that not all transactions are settled and stored on the main  blockchain. In this paper, we model the emergence of the Lightning Network as a (bond) percolation process and we explore how the distributional properties of the volume and size of transactions per user may impact its feasibility. The agents are all able to reciprocally transfer Bitcoins using the main blockchain and also – if economically convenient – to open a channel on the Lightning Network and transact “off chain”. We base our approach on fitness-dependent  network models: as in real life, a Lightning channel is opened with a probability that depends on the “fitness” of the concurring nodes, which in turn depends on wealth and volume of transactions. The emergence of a connected component is studied numerically and analytically as a function of the parameters, and the phase transition separating regions in the phase space where the Lightning Network is sustainable or not is elucidated. We characterize the phase diagram determining the minimal volume of transactions that would make the Lightning Network sustainable for a given level of fees or, alternatively, the maximal cost the Lightning ecosystem may impose for a given average volume of transactions. The model includes parameters that could be in principle estimated from publicly available data once the evolution of the Lighting Network will have reached a stationary operable state, and is fairly robust against different choices of the distributions of parameters and fitness kernels.

Laying the foundation for smart contract development: an integrated engineering process model
Christian Sillaber, Bernnhard Waltl, Horst Treiblmaier, Ulrich Gallersdörfer & Michael Felderer

ABSTRACT: Smart contracts are seen as the major building blocks for future autonomous blockchain- and Distributed Ledger Technology (DLT)-based applications. Engineering such contracts for trustless, append-only, and decentralized digital ledgers allows mutually distrustful parties to transform legal requirements into immutable and formalized rules. Previous experience shows this to be a challenging task due to demanding socio-technical ecosystems and the specificities of decentralized ledger technology. In this paper, we therefore develop an integrated process model for engineering DLT-based smart contracts that accounts for the specificities of DLT. This model was iteratively refined with the support of industry experts. The model explicitly accounts for the immutability of the trustless, append-only, and decentralized DLT ecosystem, and thereby overcomes certain limitations of traditional software engineering process models. More specifically, it consists of five successive and closely intertwined phases: conceptualization, implementation, approval, execution, and finalization. For each phase, the respective activities, roles, and artifacts are identified and discussed in detail. Applying such a model when engineering smart contracts will help software engineers and developers to better understand and streamline the engineering process of DLTs in general and blockchain in particular. Furthermore, this model serves as a generic framework which will support application development in all fields in which DLT can be applied.
streamline the engineering process of DLTs in general and blockchain in particular.
Furthermore, this model serves as a generic framework which will support application
development in all fields in which DLT can be applied.

Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers
Paolo Giudici, Thomas Leach & Paolo Pagnottoni

ABSTRACT: The paper aims to assess, from an empirical viewpoint,the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we first find the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others.We then look at how the stability of either stablecoin is affected by currency shocks, by means of VAR models and impulse response functions. Our empirical findings show that our basket based stablecoin is less volatile than all single currencies. This results is fundamental for policy making, and especially for emerging markets with a high level of remittances: a librae (basket based stablecoin) can preserve their value during turbolent times better than a libra (single currency based stablecoin).

The Impcat of Taproot and Schnorr on Address Clustering Analysis of Bitcoin Transactions
Alexi Anania & Ken Hodler

Available online only and not in the print edition here.

ABSTRACT: Bitcoin Core developers have two new technological improvements planned for the Bitcoin Core client in 2020: Taproot and Schnorr. These upgrades were formally suggested in BIPs 340, 341, 342 and provide solutions to improve the privacy and anonymity of bitcoin transactions. Thus far, a technique called address clustering has been successfully used by law enforcement organizations and other forensic investigators to trace pseudonymous bitcoin transactions to a real world identity. In this paper, we examine the implications of Taproot and Schnorr on clustering analysis, to conclude that the aforementioned BIPs are anticipated to have minor impacts. Thus address clustering analysis will continue to be a useful heuristic for forensic investigators, once Taproot and Schnorr are fully implemented.

Exploring DLT and Blockchain for alternative finance
Danny Weber

Available online only and not in the print edition here.

ABSTRACT: The European Crowdfunding Network AISBL (ECN) is a professional network promoting adequate transparency, (self) regulation and governance while offering a combined voice in policy discussion and public opinion building. ECN was formally incorporated as an international not-for-profit organisation in Brussels, Belgium in 2013.
We execute initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry as a key aspect of innovation within alternative finance and financial technology. We aim to increase the understanding of the key roles that crowdfunding can play in supporting entrepreneurship of all types and its role in funding the creation and protection jobs, the enrichment of European society, culture and economy, and the protection of our environment.
In that capacity we help developing professional standards, providing industry research, as well as, professional networking opportunities in order to facilitate interaction between our members and key industry participants. ECN maintains a dialogue with public institutions and stakeholders as well as the media at European, international and national levels.

Some papers are available online only and not in the print edition. For those papers the links to them are available in the Featured Papers and Abstract section.

Can Cryptocurrencies Preserve Privacy and Comply with Regulations?

Geoffrey Goodell, Tomaso Aste

Cryptocurrencies offer an alternative to traditional methods of electronic value exchange, promis-ing anonymous, cash-like electronic transfers, but in practice they fall short for several key reasons.We consider the false choice between total surveillance, as represented by banking as currently im-plemented by institutions, and impenetrable lawlessness, as represented by privacy-enhancing cryp-tocurrencies as currently deployed. We identify a range of alternatives between those two extremes,and we consider two potential compromise approaches that offer both the auditability required forregulators and the anonymity required for users.