An L1-L2 blockchain ecosystem combines high transaction throughput with secure asset settlement, making it likely to play a central role in the migration of financial markets to blockchain-based infrastructure. We provide an economic model of endogenous financial activity within an L1-L2 ecosystem to assess its potential economic value. We demonstrate that liquidity provision and trading volume are likely to migrate from L1 to L2, potentially...

Blockchain technology holds the promise of transforming our financial system, but a key question lingers regarding whether this technology can ensure secure settlement. We develop an equilibrium model to study that question with regard to the most prominent blockchain type, a Proof-of-Stake (PoS) blockchain. We demonstrate that blockchain settlement security increases with the economic productivity generated by the blockchain. Moreover, we show that blockchain settlement...

We demonstrate that increasing trading fees at a decentralized exchange (DEX) can increase DEX trading volume. This result arises due to the fact that higher DEX fees can endogenously reduce the price impact of trading at the DEX, thereby reducing the overall DEX trading cost and driving trading activity to the DEX from competing exchanges. The referenced relationship between fees and price impacts arises because...

We examine a supply chain with a single risk-averse manufacturer who purchases from suppliers and sells to consumers. Within this context, we focus on two channels that drive blockchain adoption by the manufacturer: manufacturer risk aversion and consumer information asymmetry. With regard to the first channel, blockchain enables efficient tracing of defective products so that the manufacturer can selectively recall defective products rather than conducting...

We develop a model of Decentralized Finance (DeFi) lending platforms that set interest rates as programmable functions of the utilization of available funds. These platforms are unable to incorporate off-chain information into the platform’s interest rates, leading to inefficient DeFi equilibria that feature excess demand or supply. Absent uncertainty about withdrawals, these inefficiencies can be made arbitrarily small through an interest rate function that is...

We develop an economic model to compare equilibrium security of Proof-of-Work (PoW) versus Proof-of-Stake (PoS) blockchains. We derive general conditions to determine when PoW blockchains are more secure than otherwise equivalent PoS blockchains and vice versa. Applying real-world parameter values to these conditions, we demonstrate that PoS blockchains are more secure than otherwise equivalent PoW blockchains. Furthermore, we demonstrate that PoS's security advantage over PoW...