Allocative Inefficiencies in Public Distributed Ledgers

Allocative Inefficiencies in Public Distributed Ledgers

Spring 2023 Actuarial Science and Financial Mathematics Seminar

Date and Time: Friday, April 21, 2023, 2:00 PM (CST)

Speaker: Agostino Capponi (Columbia University)

Abstract: In public blockchains, the transparent observability of pending transactions can lead to suboptimal blockspace allocation. One of the most successful implementations to mitigate this inefficiency is to allow users to submit transactions through private pools which guarantee pre-trade privacy, at the expense of facing execution risk. We show that allowing for private transaction submission pools can reduce allocative blockspace inefficiencies and raise aggregate welfare. However, private pools neither completely eliminate frontrunning attacks nor lead to full efficiency, because validators have strong incentives to preserve rents from frontrunning transactions. To align private incentives with the social optimum, we propose a self-financing system of transfers which eliminates frontrunning, and makes it incentive-compatible for all validators to adopt private pools. We use data from Flashbots to test the empirical implications of our model including (i) welfare gains from private pools for validators and users, and (ii) adoption rates of private pools for validators, users, and frontrunning attackers. (joint work with Ruizhe Jia and Ye Wang).

About: Agostino Capponi is an Associate Professor of Industrial Engineering and Operations Research  at Columbia University, where he is also the director of the Center for Digital Finance and Technologies, and a member of the Data Science Institute. Agostino’s research interests are in systemic risk and economic networks, financial technology, tokenomics, and market microstructure. Agostino’s research has been published in major journals of his field, including  Management Science, Operations Research, Journal of Political Economy, Journal of Monetary Economics, Review of Asset Pricing Studies, Journal of Financial and Quantitative Analysis, and Mathematical Finance. Agostino is a fellow of the Crypto and Blockchain Economic Research Forum, an academic fellow of the Luohoan Academy established by the Alibaba Group, and external research fellow at the Fintech@Cornell Center. Agostino’s research has been funded by major public agencies including the NSF, DARPA, U.S. Department of Energy, and private agencies and corporations including J.P. Morgan, IBM, Ripple, the Ethereum Foundation, the Institute for New Economic Thinking, the Global Risk Institute, the Clearpool Group, and the OCP Group. Agostino is an Editor of Management Science in the Finance Department. He is also a co-editor of Mathematics and Financial Economics, and the financial engineering area editor of Operations Research Letters. Agostino currently serves as an associate editor of Operations Research, Finance and Stochastics, SIAM Journal on Financial Mathematics,  Applied Mathematical Finance, Frontiers of Mathematical Finance, Stochastic Systems, Stochastic Models, and the American Institute of Mathematical Sciences Journal of Dynamics & Games. Agostino is a member of the Council of the Bachelier Finance Society. He also served as the Chair of the SIAM Activity group in Financial Mathematics and Engineering for the biennium 2020-2021, and as the President of the INFORMS Finance Section for the triennium 2019-2021. Agostino is a recipient of the NSF CAREER Award, the inaugural JP Morgan AI Faculty Research Award, the Columbia-IBM Center for Blockchain & Data Transparency Research Award, a honorable mention from the MIT Center for Finance and Policy and the Harvard Crowd Innovation Laboratory, and the Bar-Ilan prize for general research in financial mathematics. His research also also been recognized with best paper awards at Fintech Conferences and INFORMS Conferences. Agostino’s research has received attention by various media outlets, including Thomson Reuters, the American Banker, Vox, Oxford Business Law, and the Chicago Booth Review. Agostino holds a world patent for a target tracking methodology in military networks. He has collaborated with major regulatory agencies tasked with risk monitoring and policy making, including the Department of Treasury, and the Federal Reserve Board. Agostino has been a visiting scholar at the Federal Reserve Bank of New York in the Fall 2022, and served as an External Consultant at the U.S. Commodity Futures Trading Commission, Office of the Chief Economist from 2015 through 2021. Agostino received his Master and Ph.D. Degree in Computer Science and Applied and Computational Mathematics from the California Institute of Technology, respectively in 2006 and 2009. An updated version of his CV is available here.