Discussion Papers

UCL CBT Associates Discussion Papers

UCL CBT Discussion Paper Series

No. 4 – Q3 2020

Featured Papers and Abstracts

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.

No. 3 – Q2 2020

Featured Papers and Abstracts

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.

No. 2 – Q1 2020

Featured Papers and Abstracts

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.

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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.

No. 1 – Q4 2019

Featured Papers and Abstracts

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.

Editorial Board

Tomaso Aste

Chairmen of the Editorial BoardProfessor, Complexity Science, UCL

Quinn DuPont

Assistant Professor, University College Dublin

Daniel Heller

Honorary Professor, UCL

Seongbae Lim

Professor, St. Mary's University

Ralf Wandmacher

Professor, Accadis University

Andy Yee

Andy Yee

Public Policy Director at Visa

Call For Papers

UCL CBT Discussion Paper Q4 2020

The UCL CBT invites you to submit your research on DLT and BLockchain to our third publication of the UCL CBT Discussion Paper Series this year. The discussion paper will be published on a quarterly basis featuring the latest developments in the blockchain and DLT space. The submissions are circulated among the members of the UCL CBT Editorial Board, led by the Scientific Director so that the results of the research receive prompt and thorough professional scrutiny. A selected few discussion paper authors may be invited to host a research seminar. All accepted submissions will be included in the UCL CBT Research Paper Database.

The aim of the CBT Discussion Paper Series is to share recent developments and state-of-the-art solutions on blockchain and DLT of researchers form an interdisciplinary background with the UCL CBT Community. We, therefore, encourage the submission of recently published papers (<12 months) or pre-submission papers, however, all submissions are welcome. Topics of interest include but are not limited to:

  • Blockchain in the digital economy
  • Cryptocurrencies
  • Distributed systems
  • Security in distributed systems

For the Q4 2020 Discussion Paper Series edition, we would especially welcome contributions on stablecoins and CBDC around:

  • How can algorithms and startups create stable currencies when central banks have always failed do so in the past?
  • Do Central Bank Digital Currencies actually require a blockchain?
  • How can anonymous digital currencies be compliant with international law?

With the submission, authors agree for their papers to be published under a non-exclusive license to distribute*.

Important Dates:
Paper submission deadline: 5th January 2021

Instructions for Authors:
Please ensure that the paper is no longer than 10,000 words, the writing is in size 12 Times New Roman font, the page should have 1-inch margins, should have one and a half or double spacing, and please provide full citations in a recognized standard within your field. We reserve the right to alter the formatting or style of your work at our discretion to match our editorial standards.

For any questions related to the Call for Papers please get in touch with our Research Coordinator at blockchain_research@ucl.ac.uk

* The author(s) grant the UCL CBT a perpetual, non-exclusive license to distribute this article; the author(s) certify that they have the right to grant this license; the author(s) understand that submissions cannot be completely removed once accepted; the author(s) understand that the UCL CBT reserves the right to reclassify or reject any submission.

Discussion Paper Submission Form