Trustless crypto-markets: Perceptions of Value, Risk and Cost.

Mutual Distributed Ledgers, or Blockchains, are a type of database that takes records and puts them in a block, where each block is chained to the next one using a cryptographic signature; in other words, trust is embedded, no explicit chain of trust is necessary. Smart Contracts using Blockchain technology are already being tested by consortiums of global banks in settlements of cross border payments, and by the general public in crowdfunding-like entities. Smart contracts not only allow to create objects with various degrees of liquidity, but also to automate the operations of a fund, enabling trust-less crypto markets. Despite great promise, the sources of uncertainty and risk in such trustless settings are not yet well understood; for instance “The DAO” (Decentralised Autonomous Organisation) which was the world’s first decentralised investment fund, went from being the largest crowdfunding event in history (reaching over $150M capitalization less than a month after its launch in May 2016) to get about a third of its assets compromised only weeks later due to an attack from a shareholder- after much deliberation, the community decided to hard fork (roll back the code) to recover the funds. In this paper we study the perception of value, risk and cost for Blockchain investments. But the dual nature of money shared by the Blockchain calls for a hybrid approach: since the DAO is a listed entity by default, and its projects are financial instruments as well, we use network correlations to study portfolio risk diversification. Furthermore, automated corporations are essentially about decentralized intelligence, so we need to consider the strategic nature of the social world and its irreducible complexity; for this we map the vector field and use signal processing to investigate volatility in traffic flows – a precursor to apply machine learning to the problem in the future. In short, we are proposing a method to investigate whether decentralized organizations are perceived as truly “trustless entities”, or, if investors are rather forced to “trust in the design”, and therefore the full cost of being trustless should be factored in.

Trustless crypto-markets: Perceptions of Value, Risk and Cost. 2016. https://dx.doi.org/10.2139/ssrn.2856755
September 19, 2016

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Sources: https://dx.doi.org/10.2139/ssrn.2856755