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3/7: Agostino Capponi – Second-Generation Blockchains: Incentives, Adoption, and Transparency
March 7, 2022 @ 3:30 pm - 4:30 pm
Abstract: Blockchain is a distributed ledger technology built around the principles of transparency and decentralization. Initially conceived as the backbone technology to enable cryptocurrency payments, blockchain has expanded to support a large class of business applications, ranging from financial to supply chain services.
In this talk, we argue that the current design of second generation blockchains may severely limit the adoption of decentralized financial innovations. We begin by discussing adoption of automated Market Makers (AMMs), the most prominent class of blockchain-based decentralized exchanges (DEX). Using game theoretical models, we show that limited adoption arises because of the fee-based order-processing mechanism and the liquidity pooling nature of DEX. We then study adoption problems of private communication channels, proposed to address the information leakage problem created by full transparency on pending blockchain financial transactions. We show that these channels cannot fully align the economic incentives of users and validators, and do not completely eliminate inefficiencies resulting from information leakage, such as frontrunning risk and high transaction costs.
We conclude with a brief highlight of research challenges in the context of blockchain technologies, with focus on operations management and financial services. (based on joint work with Ruizhe Jia).