Paper Type
Complete
Paper Number
1385
Description
Recently, Ethereum, the second largest cryptocurrency, changed its consensus mechanism from Proof-of-Work to Proof-of-Stake. While this change has long been in the making to improve scalability and decrease energy consumption, it also impacts other factors that are incremental to cryptocurrency usage and adoption, such as market liquidity. We therefore utilize cryptocurrency price data to analyze the impact of change in consensus mechanism on market liquidity. By identifying cut-off dates and approximate measures for liquidity, various difference-in-difference and lagged-dependent-variable analyses are performed. We find that the change in consensus mechanism has a significant impact on price, suggesting a deterioration of market liquidity. However, tightened spreads suggest an increase in market liquidity, leading to the conclusion of a decrease in market breadth. This work provides a first step in the comprehensive analysis of change in consensus mechanisms. It thereby offers guidance for cryptocurrency developers and communities on whether to change consensus mechanisms.
Recommended Citation
Tronnier, Frédéric; Stoev, Aleksandar; Hamm, Peter; and Löbner, Sascha, "Better Than Ever? Analyzing The Impact of Change in Consensus Mechanism On Market Liquidity For Ethereum" (2024). PACIS 2024 Proceedings. 1.
https://aisel.aisnet.org/pacis2024/track02_blockchain/track02_blockchain/1
Better Than Ever? Analyzing The Impact of Change in Consensus Mechanism On Market Liquidity For Ethereum
Recently, Ethereum, the second largest cryptocurrency, changed its consensus mechanism from Proof-of-Work to Proof-of-Stake. While this change has long been in the making to improve scalability and decrease energy consumption, it also impacts other factors that are incremental to cryptocurrency usage and adoption, such as market liquidity. We therefore utilize cryptocurrency price data to analyze the impact of change in consensus mechanism on market liquidity. By identifying cut-off dates and approximate measures for liquidity, various difference-in-difference and lagged-dependent-variable analyses are performed. We find that the change in consensus mechanism has a significant impact on price, suggesting a deterioration of market liquidity. However, tightened spreads suggest an increase in market liquidity, leading to the conclusion of a decrease in market breadth. This work provides a first step in the comprehensive analysis of change in consensus mechanisms. It thereby offers guidance for cryptocurrency developers and communities on whether to change consensus mechanisms.
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Blockchain