About Prof. Ye Li

Figure 1: Prof. Ye Li

Introduction to Prof. Ye Li:

Ye Li is an Assistant Professor of Finance at the Ohio State University Fisher College of Business, Charles A. Dice Center fellow, and Don Shackelford Fellow. Ye is a Lamfalussy Research Fellow at European Central Bank and an affiliate of the Center for Economic Studies at the University of Munich (CESifo), Finance Theory Group, and Macro-Finance Society. His research focuses on money and banking, fintech, and asset pricing. Ye’s papers have been accepted at the American Economic Review, Review of Financial Studies, and Journal of Financial Economics. Ye’s research has received awards from Becker-Friedman Institute at the University of Chicago, CFA Institute, Chicago Mercantile Exchange, and European Winter Finance Summit. His papers are presented at leading academic conferences and policy institutions, such as the American Finance Association, Bank of Canada, CEPR, CESifo, Cornell University, European Central Bank, European Finance Association, ETH Zurich, Federal Reserve, Finance Theory Group, INSEAD, London School of Economics, Macro-Finance Society, NBER, Northwestern University, Stanford, University of Chicago, University of Pennsylvania, and Western Finance Association. Ye’s research is available at yeli-macrofinance.com. In 2017, Ye received his Ph.D. in Finance and Economics from Columbia University, 2017.

Watch our AMA interview for Prof. Ye Li on our YouTube channel, SciEcon.

Read the Interview Scripts with annotations and citations.

Questions 1

Xinyu:

In both of your articles Tokenomics: Dynamic Adoption and Valuation and Token-based Platform Finance, you are talking about building a novel tokenomics model. Could you please briefly introduce your incentives in the field of blockchain and cryptocurrency?

Prof. Li:

When we start this project, we’re also newcomers to this field, and what we really want to do is to write down mathematical models that can help us to understand what a token-based ecosystem is. Because once you write down these models and formalize these concepts, like the idea of user-base, the quality of the platform, and how to specify the dynamics of token price… Once you start to formalize things and write them in a mathematical form, you can start to understand better. In the process of searching for the model that fits the reality the best, we have to read a lot of materials and try to capture the first-order issues that most practitioners and regulators pay attention to in the field of cryptocurrency or the economics of token which we call tokenomics. One thing that we consider the most important is the concept that a token, especially a narrowly defined utility token, is really the native currency of a digital platform.

Figure 2: Digital Platform

Think about a digital platform as a country. If your country is running very well with a lot of economic activities, what you tend to observe is that your country’s currency will appreciate in the foreign exchange market. That’s typically how we relate economic fundamentals to the fluctuation of the price of a country’s currency.

However, how do you build the analogy between a country and a platform? Just think of it as a place where people meet each other and conduct transactions.

Figure 4: Transactions

People interact with each other and transactions take place in a country, but digital platforms, like Taobao or Tmall, they’re also where people conduct transactions. Basically, if you have a platform where a lot of economic activities taking place and you have a native currency that is required in the means of payment for people to settle transactions, then you have a natural positive correlation between the number of economic activities taking place on the platform and the value of your cryptocurrency. This is the first step. By recognizing that you can run your platform as a country, you can introduce your own currency and the value of your currency will reflect the economic activities and how popular your platform is. In step two, what we think about is why the introduction of platform-specific currencies happened recently: we have digital platforms all the time, we have had Alibaba in China for more than 20 years and we have Amazon in the United States for almost the same period of time, but they never introduce the cryptocurrency. Why do these new platforms start to introduce cryptocurrencies recently? Let me just give you an example. This is one of my favorite cryptocurrencies especially when we come to utility tokens, it is called the basic attention token. What a basic attention token does is that it provides a platform for people to buy or sell attention, which sounds very abstract but actually very interesting and concrete. If you are an advertiser, you buy advertising spaces by paying the Basic Attention Token (BAT).

Figure 5: Basic Attention Token

But where are these advertising spaces and where are the advertisements being posted? They are posted on the BAT web browser which is just like Google Chrome or Internet Explorer. If you want to post advertisements on their browser, you buy BAT. That’s the demand for BAT. But where is the supply? BAT will increase the supply by issuing new tokens to reward the browser user. If you use the browser, spending time reading one advertisement, depending on the allocation of the attention you receive new tokens which are the newly issued BAT. That’s how the supply increases. The supply of BAT increases to reward the browser users who pay attention. The demand for BAT increases when there are people who want to do advertisements. They sell dollars to buy BAT so that they can use BAT to pay for advertisement spaces. But when will the BAT price appreciates? When you see the advertisers keep coming into this particular platform to buy attention since it’s a very good and productive platform with a lot of web browser users, the demand for it increases and that’s when the price of BAT increases. So the second driver in tokenomics is that to introduce token or native currency on a digital platform is to let early comers know that they can be rewarded with cryptocurrency since they come early and they can expect that the cryptocurrency will appreciate in the value in the future if the platform is indeed a good platform and will grow in popularity with more and more people joining in, making the demand for this cryptocurrency stronger. That’s the same logic if we go back to the analogy with our country. If you think this country is very promising and will grow in terms of economy and become more and more powerful, you will expect its currency to appreciate. The Chinese currency has been strengthening in the last decades. When I was a kid, the exchange rate between the US dollar and RMB was eight to one; For now, it is around 6.2 to 6.5 depending on which period of time. This secular appreciation of the Chinese currency is directly linked to the very stable circular growth of the Chinese economy. Going back to the platform. If the platform is expected to grow in popularity and the number of economic activities it supports, the early comers who receive these tokens in the beginning, expect appreciation. If you are thinking about whether to join the platform, you will want to join early if you think it is indeed a good platform and you want to hold cryptocurrency and enjoy the potential appreciation in the future. So the first step is to conceptually link the platforms’ economic activity to the value of the cryptocurrency; And the second conceptual link is that by introducing a native currency on the platform, you basically front-load the expected growth of the platform into the expected appreciation of the platform’s native currency so that early comers want to join, to hold the cryptocurrency as assets, and become part of the community. The reason why a digital platform wants to introduce cryptocurrency is precise to stimulate early adoption. Now it comes to the third step which is very critical for a platform developer: how can you persuade the potential users that your network is really good and going to be better in the future? It depends on the communication. That’s why you really need to write a very informative White Paper to know how this platform will grow to give people confidence and then you can stimulate early adoption and you need to make it very clear the tokenomics. Remember that we talked about the example of basic attention tokens, you need to tell people where the supply and demand come from. If you increase the demand the price of the crypto will increase, this means deflation, which refers to money becoming more valuable. Deflation pressure comes from the expanding demand and the inflationary pressure that makes the currency less valuable and it comes from the increasing supply. When you increase supply, you better use it for good purposes like rewarding early adopters and contributors who either contribute in developing software for this particular platform or miners who maintain the ledger, making sure that all the transactions on the platform are recorded correctly, which is also a kind of contribution to the infrastructure. So when you issue more tokens you better make sure that these tokens are being rewarded to the most productive people or people contributing to the community. When the demand and the supply increase at the same time, that’s when you observe the price being stable; Even the demand can increase faster than the supply, then you can expect the price to increase over time and that is what we want. Basically, for platform developers, it is necessary to do these communications carefully, telling people where the growth trajectory lies and make the tokenomics very clear, including the supply and demand of tokens, why and when they happen, and the mechanism. So, the basic idea is that, if you have a country with economic activities, the currency tends to appreciate; While the same thing can be applied to a platform.

Questions 2

Xinyu:

Thank you so much for sharing your interest in cryptocurrency and digital platform governance and also the three-step incentives and we’ve got a better understanding of how cryptocurrency helps to govern and stimulate the platform and users. The second question is also related to the token economy. We know you’re doing research on cryptocurrency and focus on platform tokens. And the token economy has significant practical impacts on all stakeholders. So how do you think the token economy will reshape the way scholars do research in finance and collaborate with practitioners?

Prof. Li:

Very good question. I am still struggling to try to find the answer myself, so let me just share with you some preliminary thoughts. Finance as a field evolved out of macroeconomics. In the United States, the premier institution is called National Bureau of Economic Research or NBER in short. Before the 1980s, there was no asset pricing or corporate finance groups in the NBER; asset pricing means capital markets and corporate finance means corporate decisions regarding investment, financing, governance, etc. The asset pricing and corporate finance groups evolved out of the monetary economics group in the NBER. The new area of the cryptocurrency really encourages researchers to go back to the root and find the connection between macroeconomics and finance and really go back to the previous generations, what James Tobin and Milton Friedman thought about. When these people think about monetary economics, finance is always there. Then, this field bifurcated: “macro-people” do “macro” and “finance-people” do “finance”.

Figure 6: Finance & Economics

Now we need them to come together, that’s how we can understand digital currency or cryptocurrency because almost every currency is embedded on platforms where people transact. Different platforms support different economic activities like a country as I mentioned before. So just by connecting with the old literature or maybe the new literature of monetary economics, it can really help us understand and both the corporate finance aspect of cryptocurrency and the asset pricing aspect. So that’s the first thing I want to talk about. Really going back to the root, bring money and finance together. This is also what Markus Brunnermeier, a Professor at Princeton University Economics Department, is trying to advertise. If you have a chance, go to his website, he has a lot of good stuff on both monetary economics and cryptocurrency. I myself come from a macro-finance background; I do research in corporate finance now but more from a macroeconomic point of view. The second thing I want to say which is also very important is to combine computer science and finance. Because right now we still have this segmentation, which is that people in CS do a lot of interesting research in many cases based on game theory, they do research on cryptocurrency, and finance people do their own thing. There should be more communication between these two fields, which I think Professor Zhang has been very active in building this bridge, and I can see a lot of activities in your university which are very encouraging and promising. Why? Computer scientists, although they know the game theory, when it comes to dynamic systems or dynamic interaction of many agents, still have a lot to learn from finance, economics, and monetary economics in particular. And there are issues in monetary economics that people have thought about for three or four hundred years, maybe even earlier than Adam Smith [1]; So people think about money as a subject for hundreds of years. Now we have computer scientists coming and want to do something and reinvent the wheel. There’s no such necessity; read economics literature and then you will find a lot of things already very clear. On the other hand, the finance people think about will all these economics, mechanisms, all these incentives on the economic participants also hold in a token-based environment. But what about the fundamental issue? How are these infrastructures being built? Because in many cases, the working of the infrastructure itself, which depends on a lot of knowledge of computer science, is very intertwined with the supply and demand of the tokens.

And that’s why I say a lot of work from the interaction between computer science and finance can be very promising in this area. The last point I want to make is that you have to talk to the practitioners. You cannot just stay in the ivory tower. You have to talk with practitioners like what you guys do here and when we talk to the practitioners, we can recalibrate our thinking process. For instance, in the paper Tokenomics: Dynamic Adoption and Valuation, when I write down the valuation formula, I think it’s reasonable because a lot of practitioners emphasize that when you value the cryptocurrency, you have to value it with respect to the user base. It is like when you value a bank you value the market cap with respect to the book value of equity. And if you look at people on Wall Street nowadays who do a lot of interesting research like Thomas Lee in Fundstrat, they all emphasize the same thing — the total cap of the cryptocurrency should be linked to the total number of active users — this goes back to the idea that the currency of a country or digital platform is more valuable when there are more economic activities proxied by the number of users.

Questions 3

Zesen:

Thank you for sharing three points about how cryptocurrency and platform tokens promote collaboration between scholars and cooperative firms and how computer science can be interdisciplinary for monetary economics and collaboration between academia and industry which definitely support a real usage of the new technology. I think this one would be the last question for this interview which is related to Dfinity’s Internet Computer. The Internet Computer, IC, in short, is the first frictionless blockchain with web speed and the Internet-scale throughout the world. It extends the functionality of the public Internet so that it can be hosting software, transforming it into a global computing platform. So do you think Internet Computer or any other decentralized technology can solve the blockchain trilemma, which isdecentralization, scalability, and security? And how do you think the Internet Computer can possibly empower the financial industry and your research in this area?

Prof. Li:

Since we don’t have a lot of time left, I’ll just cut my answer short. The short answer is yes, and I think it is a very promising project. I think it is a very good idea of web 3.0 based on decentralized computing. Going back to what we talked about before, the theme of our conversation today is that if you want a cryptocurrency to succeed, you better build a good platform that can support a variety of economic activities, because the more economic activities, the better the cryptocurrency performs. So, to my knowledge, Dfinity has its own cryptocurrency with very sophisticated tokenomics, especially the deflationary force is directly linked to what people can do on this platform. And people can do a lot of things if you enable decentralized computing. The predecessor of decentralized computing is edge computing.

Figure 8: Edge Computing

We all have mobile devices and we can do computation on mobile devices, we can enable some remote computers to access our mobile devices and do computation there. So decentralized computing can certainly enable a lot of things. So I think it is a very promising project because it can enable a lot of blockchain-based activities. Another thing I want to mention is scalability. So I have first to admit that I am not an expert on Dfinity itself so I just try to read as much as I can. But to my knowledge, it is quite a scalable network. Because the more people join the platform, the more computational power the platform will have. If we have more computational power, the throughput of the payment system can be increased. This is quite different from Bitcoin. I am not going to comment on Ethereum since I am still trying to learn Ethereum 2.0 and the transition from proof of work to proof of stake — but to my knowledge, Bitcoin has very limited throughput because of the particular design of tokenomics. When more people want to transact, they just over-bid each other in terms of the transaction fees. But when the transaction fees go up, this would invite more and more miners since they want to mine the Bitcoin and earn the transaction fee. But when more miners come onto the network, it is more difficult to reach a decentralized consensus among the increasing number of miners. There is a dilemma of bitcoin adoption scalability and I recommend a paper from Fahad from Wake Forest University and Kose John and Franz J. Hinzen from New York University, they have a great paper on the limited adoption of Bitcoin exactly about this point. But to my understanding, Dfinity is not subject to this problem, so that’s why I am particularly optimistic on the scalability side. In terms of security, I don’t have a lot to say about this because I am not an expert in cyber security. But I know they do have a lot of great scientists working on this, so let’s see. I think in the future, we’re going to see a lot of news coming from this project and I am looking forward to their achievements.

Xinyu:

Thank you so much, this is all for the interview.

Prof. Li:

Thank you for inviting me and I look forward to your other interviews and all your publications. It is very impressive work that you’re doing.

Relevant Materials

[1] Adam Smith

Adam Smith FRSA (baptized 16 June [O.S. 5 June] 1723— 17 July 1790) was a Scottish economist, philosopher, moral philosopher, pioneer of political economy, and a key figure during the Scottish Enlightenment. Also known as “The Father of Economics’’ or “The Father of Capitalism’’.

Acknowledgments:

Interviewee: Prof. Ye Li

Interviewer: Xinyu Tian, Zesen Zhuang

Executive Editors: Xinyu Tian, Zesen Zhuang

Chief Editor: Prof. Luyao Zhang