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On the sources of systemic risk in cryptocurrency markets
  • Percy Venegas
Percy Venegas
Economy Monitor
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Value in algorithmic currencies resides literally in the information content of the calculations; but given the constraints of consensus (security drivers) and the necessity for network effects (economic drivers), the definition of value extends to the multilayered structure of the network itself --that is, to the information content of the topology of the nodes in the blockchain network, and, on the complexity of the economic activity in the peripheral networks of the web, mesh-IoT, and so on. In this boundary between the information flows of the native network that serves as the substrate to the blockchain, and that of the real-world data, is where a new "fragility vector" emerges; the intensity of demand (as encoded in traffic flows) gives rise to a field, and the increase on demand affects the structure of the field, akin to a phase change. Our research question is whether factors related to market structure and design, transaction and timing cost, price formation and price discovery, information and disclosure, and market maker and investor behavior, are quantifiable to the degree that can be used to price risk in digital asset markets. The results obtained show that while in the popular discourse blockchains are considered robust and cryptocurrencies anti-fragile, the cryptocurrency markets are in fact fragile. This research is pertinent to the regulatory function of governments, that are actively seeking to advance the state of knowledge regarding systemic risk, to develop policies for crypto markets, and for investors, who are in need of expanding their understanding of market behavior beyond explicit price signals and technical analysis.