arXiv subjects

Jan Christoph Schlegel

Publications and source records attributed to Jan Christoph Schlegel.

8 recordsLinked to original sources

arXiv2023

Shared Sequencing and Latency Competition as a Noisy Contest

We study shared sequencing for different chains from an economic angle. We introduce a minimal non-trivial model that captures cross-domain arbitrageurs' behavior and compare the performance of shared sequencing to that of separate sequencing. While shared sequencing dominates separate sequencing trivially in the sense that it makes it more likely that cross-chain arbitrage opportunities are realized, the investment and revenue comparison is more subtle: In the simple latency competition induced by First Come First Serve ordering, shared sequencing creates more wasteful latency competition compared to separate sequencing. For bidding-based sequencing, the most surprising insight is that the revenue of shared sequencing is not always higher than that of separate sequencing and depends on the transaction ordering rule applied and the arbitrage value potentially realized.

cs.GT↗

arXiv2023

Buying Time: Latency Racing vs. Bidding in Transaction Ordering

We design TimeBoost: a practical transaction ordering policy for rollup sequencers that takes into account both transaction timestamps and bids; it works by creating a score from timestamps and bids, and orders transactions based on this score. TimeBoost is transaction-data-independent (i.e., can work with encrypted transactions) and supports low transaction finalization times similar to a first-come first-serve (FCFS or pure-latency) ordering policy. At the same time, it avoids the inefficient latency competition created by an FCFS policy. It further satisfies useful economic properties of first-price auctions that come with a pure-bidding policy. We show through rigorous economic analyses how TimeBoost allows players to compete on arbitrage opportunities in a way that results in better guarantees compared to both pure-latency and pure-bidding approaches.

cs.GT↗

arXiv2023

Would Friedman Burn your Tokens?

Cryptocurrencies come with a variety of tokenomic policies as well as aspirations of desirable monetary characteristics that have been described by proponents as 'sound money' or even 'ultra sound money.' These propositions are typically devoid of economic analysis so it is a pertinent question how such aspirations fit in the wider context of monetary economic theory. In this work, we develop a framework that determines the optimal token supply policy of a cryptocurrency, as well as investigate how such policy may be algorithmically implemented. Our findings suggest that the optimal policy complies with the Friedman rule and it is dependent on the risk free rate, as well as the growth of the cryptocurrency platform. Furthermore, we demonstrate a wide set of conditions under which such policy can be implemented via contractions and expansions of token supply that can be realized algorithmically with block rewards, taxation of consumption and burning the proceeds, and blockchain oracles.

econ.TH↗

arXiv2023

Axioms for Constant Function Market Makers

We study axiomatic foundations for different classes of constant-function automated market makers (CFMMs). We focus particularly on separability and on different invariance properties under scaling. Our main results are an axiomatic characterization of a natural generalization of constant product market makers (CPMMs), popular in decentralized finance, on the one hand, and a characterization of the Logarithmic Scoring Rule Market Makers (LMSR), popular in prediction markets, on the other hand. The first class is characterized by the combination of independence and scale invariance, whereas the second is characterized by the combination of independence and translation invariance. The two classes are therefore distinguished by a different invariance property that is motivated by different interpretations of the numéraire in the two applications. However, both are pinned down by the same separability property. Moreover, we characterize the CPMM as an extremal point within the class of scale invariant, independent, symmetric AMMs with non-concentrated liquidity provision. Our results add to a formal analysis of mechanisms that are currently used for decentralized exchanges and connect the most popular class of DeFi AMMs to the most popular class of prediction market AMMs.

cs.GT↗

arXiv2022

On-Chain Auctions with Deposits

Second-price auctions with deposits are frequently used in blockchain environments. An auction takes place on-chain: bidders deposit an amount that fully covers their bid (but possibly exceeds it) in a smart contract. The deposit is used as insurance against bidders not honoring their bid if they win. The deposit, but not the bid, is publicly observed during the bidding phase of the auction. The visibility of deposits can fundamentally change the strategic structure of the auction if bidding happens sequentially: Bidding is costly since deposit are costly to make. Thus, deposits can be used as a costly signal for a high valuation. This is the source of multiple inefficiencies: To engage in costly signalling, a bidder who bids first and has a high valuation will generally over-deposit in equilibrium, i.e.~deposit more than he will bid. If high valuations are likely there can, moreover, be entry deterrence through high deposits: a bidder who bids first can deter subsequent bidders from entering the auction. Pooling can happen in equilibrium, where bidders of different valuations deposit the same amount. The auction fails to allocate the item to the bidder with the highest valuation.

cs.GT↗

arXiv2021

Equivalent Choice Functions and Stable Mechanisms

We study conditions for the existence of stable and group-strategy-proof mechanisms in a many-to-one matching model with contracts if students' preferences are monotone in contract terms. We show that "equivalence", properly defined, to a choice profile under which contracts are substitutes and the law of aggregate holds is a necessary and sufficient condition for the existence of a stable and group-strategy-proof mechanism. Our result can be interpreted as a (weak) embedding result for choice functions under which contracts are observable substitutes and the observable law of aggregate demand holds.

econ.TH↗

arXiv2020

Mechanism Design and Blockchains

Game theory is often used as a tool to analyze decentralized systems and their properties, in particular, blockchains. In this note, we take the opposite view. We argue that blockchains can and should be used to implement economic mechanisms because they can help to overcome problems that occur if trust in the mechanism designer cannot be assumed. Mechanism design deals with the allocation of resources to agents, often by extracting private information from them. Some mechanisms are immune to early information disclosure, while others may heavily depend on it. Some mechanisms have to randomize to achieve fairness and efficiency. Both issues, information disclosure, and randomness require trust in the mechanism designer. If there is no trust, mechanisms can be manipulated. We claim that mechanisms that use randomness or sequential information disclosure are much harder, if not impossible, to audit. Therefore, centralized implementation is often not a good solution. We consider some of the most frequently used mechanisms in practice and identify circumstances under which manipulation is possible. We propose a decentralized implementation of such mechanisms, that can be, in practical terms, realized by blockchain technology. Moreover, we argue in which environments a decentralized implementation of a mechanism brings a significant advantage.

cs.GT↗

arXiv2020

The Structure of Equilibria in Trading Networks with Frictions

Several structural results for the set of competitive equilibria in trading networks with frictions are established: The lattice theorem, the rural hospitals theorem, the existence of side-optimal equilibria, and a group-incentive-compatibility result hold with imperfectly transferable utility and in the presence of frictions. While our results are developed in a trading network model, they also imply analogous (and new) results for exchange economies with combinatorial demand and for two-sided matching markets with transfers.

econ.TH↗