Two economists have developed a model for pricing bitcoin and other assets in decentralized financial networks. Emiliano Pagnotta and Andrea Buraschi, professors of finance at Imperial College Business School in London, have proposed a theoretical structure for networks based on proof of work, which include bitcoin and ethereum.

Their paper is dated March 21 of this year. Their analysis focuses on two main variables: the number of users – who represent the demand side – and the hash rate provided by miners, who represent the supply side.

The authors point out that decentralized financial networks are unique in that tokens “simultaneously serve two functions.” In addition to functioning as an asset, they incentivize miners to maintain the network.

The equilibrium price of the token, then, is the solution to “a fixed-point problem that characterizes the interaction between consumers and miners,” according to the paper. There are two solutions to this problem for any set of conditions, the paper says, one of which is $0.

“Indeed, if the price of bitcoin were zero, miners would not provide any resource to the network, and its trust would be zero. Consumers would derive no utility from the system and would not pay a positive price for bitcoins.” Read more from…

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