Discussion Papers

UCL CBT Associates Discussion Papers

UCL CBT Discussion Paper Series

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.


Download Discussion Paper Series Edition

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 Q2 2020

Blockchain and Resilience during the COVID-19 Outbreak

The COVID-19 outbreak has put life on hold for an uncertain amount of time, affecting all of us in every aspect of our daily life. Researchers and innovators are hard at work to developing solutions to slow down the spread of the virus and limit the financial distress of economies to a minimum.

With the main characteristics of blockchain, to share data in a resilient and anonymous way, some essential requirements for solutions currently in development are provided. Under the theme “Blockchain and Resilience”, in our next discussion paper series, we would like to explore the implications of COVID-19 for Blockchain and DLT. The main focus will be on understanding the role of blockchain during the pandemic and its position post-crisis. Some examples of popular research topics are listed below:

  • Blockchain solutions for COVID-19 “tracking apps”
  • Blockchain solutions for healthcare and medical records
  • COVID-19 outbreak and the crypto market
  • DTL as a fundraising and transparent management tool for charities supporting essential workers and providing critical supplies

The UCL Centre for Blockchain Technologies is pleased to announce the return of its Discussion Paper Series on Distributed Ledger Technologies. 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

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


Important Dates:
Paper submission deadline: 12 June 2020

Instructions for Authors:
Please ensure that the paper is no longer than 12,000 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 Centre Administrator Anna Gorbatcheva: anna.gorbatcheva.17@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.