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14.129 | Spring 2025 | Graduate

# Blockchain and the Design of Financial Systems

### Class Lectures with References

Readings discussed in the in-class lectures are denoted with an asterisk (*) and are required reading. A double asterisk (**) denotes material likely to be of interest for student research projects, but other readings can be explored. These are starting points.

### Lecture 1: Introduction to the Class

*Robert M. Townsend and Nicolas X. Zhang (2023), “Technologies That Replace a ‘Central Planner.’” AEA Papers and Proceedings 113: 257–262.

Robert M. Townsend (2020), Distributed Ledgers: Design and Regulation of Financial Systems. MIT Press.

Robert M. Townsend (undated), “The Role of CBDC as Public Infrastructure for Programmable Contracts.”

Robert M. Townsend (undated), Introduction (Chapter 1), “Key Elements and Patterns in Theory and Early European History,” University of Chicago - Population Research Center 93–95.

Jacky Mallett (2009), “Limits on the Communication of Knowledge in Human Organisations” (PDF). Studies in Emergent Order 2: 1–18.

### Lecture 2: Blockchains as a Data Base

#### Topics: A Unified View of Blockchains and Financial Accounts as Databases; Distinct Views of Money; The Larger Community Perspective

MongoDB (undated), “Blockchain Database: A Comprehensive Guide." MongoDB.com.

Wikipedia (2024), “Bitcoin." https://en.wikipedia.org/wiki/Bitcoin

**Paul Krugman (1998), “Baby-Sitting the Economy” Slate, 14 August 1998. Based on Joan Sweeney and Richard James Sweeney (1977), “Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis,” Journal of Money, Credit and Banking 9(1): 86–89.

Tomaž Fleischman and Paolo Dini (2024), “Neutral Settlement Layer for Interoperability between Different Forms of Local Financial Expression." Conference paper, 7th Biennial RAMICS International Conference, Rome, 6–9 November 2024.

**Hyun Song Shin (2018), BIS Annual Economic Report, Chapter V, “Cryptocurrencies: Looking beyond the Hype." BIS.org.

**Agustín Carstens (2023), “The Future Monetary System: From Vision to Reality.” BIS.org.

*Krislert Samphantharak and Robert M. Townsend (2009), Households as Corporate Firms: An Analysis of Household Finance Using Integrated Household Surveys and Corporate Financial Accounting. Econometric Society Monograph Series No. 46; Cambridge University Press

Youngjae Lim and Robert M. Townsend (1998), “General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies.” Review of Economic Dynamics 1(1): 59–118.

*Krislert Samphantharak, Scott Schuh, and Robert M Townsend (2018), “Integrated Household Surveys: An Assessment of U.S. Methods and an Innovation." Economic Inquiry 56(1): 50–80.

Anil Jain, Robert M. Townsend, and Fan Wang (2024), “Timing Lumpy Investments with Informal Bridge Loans and Clunky Formal Loans: Evidence from Thailand.” Conference paper, University of Houston BREAD-Asia (NUS) December 19, 2024.

Niklas Amberg, Tor Jacobson, Erik von Schedvin, and Robert M. Townsend (2021), ”Curbing Shocks to Corporate Liquidity: The Role of Trade Credit.” Journal of Political Economy 129(1): 182–242.

Scott Nevil (2024), “Distributed Ledger Technology (DLT): Definition and How It Works." Investopedia.com.

**Morten L. Bech and Rod Garratt (2003), “The Intraday Liquidity Management Game." Journal of Economic Theory 109(2), 198–219.

**Itay Goldstein, Ming Yang, and Yao Zeng (2023), “Payments, Reserves, and Financial Fragility." The Wharton School Research Paper (Forthcoming), 67 pp. Posted 7 September 2023.

John B. Geijsbeek, ed. and trans. (1914), Ancient Double-Entry Bookkeeping. Self-published translation of a 1494 treatise by Lucas Pacioli.

**Carlo R. W. De Meijer (2023), “Sarafu: Crypto Currency for Rural Communities.” Finextra.com.

Wikipedia (2024), “CAP theorem.”

Fernando Alvarez, Anan Pawasutipaisit, and Robert M. Townsend (2023), “Currency in Village Economies: Large Welfare Losses from the Mismanagement of Petty Cash.” Conference paper (?), 21 February 2023.

Archawa Paweenawat and Robert M. Townsend (2024), Inequality and Globalization. Princeton University Press.

Inveniam Capital Partners (2020), “Tokeny Solutions Partners with Inveniam to deliver Data Integrity and Price Discovery for Private Securities." Press release.

Inveniam Capital Partners (2019), “Update: WeWork, NDSU Housing, Cape at Savona, Impact Africa, and Tokenization." (YouTube).

### Lecture 3: Distributed Ledgers as Solution to an Information Problem

#### Topics: Fragmented Markets; Policy Objectives; Regulatory Solution; Distributed Ledgers as a Technology Solution; Statics

*Joseph M. Ostroy and Ross M. Starr (1974), “Money and the Decentralization of Exchange.” Econometrica 42(6): 1093–1113.

Thomas Ernst and Chester Spatt (2024), “Regulating Market Microstructure,” 12/30/24 draft prepared for Annual Review of Financial Economics, 2026.

Ignacio Sandoval (2024), “SEC Amends Regulation NMS to Provide for Half-Penny Quoting in Securities and Reduction in Potential Rebate Money.” Orrick.com, 24 September 2024.

Alan Riquelmy (2024), “Federal Judge Issues Sealed Order in Amazon Antitrust Case.” Courthousenews.com, 30 September 2024.

**Joseph M. Ostroy and Ross M. Starr (1990), “The Transactions Role of Money.” In Benjamin M. Friedman and Frank H. Hahn (eds.), Handbook of Monetary Economics I. North Holland.

**Antoine Martin and James McAndrews (2008), “An Economic Analysis of Liquidity-Saving Mechanisms” (PDF). FRBNY Economic Policy Review.

Bank of England (2021), “Liquidity Saving Mechanism User Guide.” Bankofengland.co.uk.

**Julian Alcazar et al. (2024), “Market Structure of Core Banking Services Providers.” Federal Reserve Bank of Kansas City.

Federal Reserve Bank of New York (2015), “Update on Tri-party Repo Infrastructure Reform." Nyfed.org, 24 June 2015.

Lucas Mearian (2019), “Walmart Launches ‘World’s Largest’ Blockchain-Based Freight-and-Payment Network.” Computerworld.com, 19 November 2019.

Michael Moore, Andreas Schrimpf, and Vladyslav Sushko (2016), “Downsized FX Markets: Causes and Implications.” BIS Quarterly Review, 11 December 2016.

**Xavier Gabaix and Matteo Maggiori (2016), “International Liquidity and Exchange Rate Dynamics.” The Quarterly Journal of Economics 130(3): 1369–1420.

**Kate Vitasek et al. (2022), “How Walmart Canada Uses Blockchain to Solve Supply-Chain
Challenges.” Harvard Business Review, 5 January 2022.

De Beers Group (2022). “De Beers Group Introduces World’s First Blockchain-Backed Diamond Source Platform at Scale.” Debeersgroup.com, 5 May 2022.

### Lecture 4: Smart Contracts as a Solution to a Coordination Problem

#### Topics: Commodity Space with Locations, Dates, and States; The Policy Objective as Pareto Criterion; Fragmented Markets; Implementation with Privately Issued Securities as Monies; Uncoordinated Issues and Market Crises; Solution with Multi-agent Smart Contract.

*Robert M. Townsend and Neil Wallace (1987), “Circulating Private Debt: An Example with a Coordination Problem.” In Edward C. Prescott and Neil Wallace (eds.), Contractual Arrangements for Intertemporal Trade, 105–120. University of Minnesota Press.

*Mariano Spector and Robert M Townsend (2018), “Notes on Circulating Private Debt, Crashes.” Working Paper, MIT.

Vitalik Buterin (2014), “Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform.” White paper. Ethereum.org.

Cryptopedia. 2023. “What Are Automated Market Makers?” Updated 5 June 2025.

Robert Wilson (1968), “The Theory of Syndicates.” Econometrica 36(1): 119–132.

Robert M. Townsend (1994), “Risk and Insurance in Village India.” Econometrica 62(3): 539–91.

Krisert Samphantharak and Robert M. Townsend (2018), “Risk and Return in Village Economies." American Economic Journal: Microeconomics 10(1): 1–40.

Cynthia Kinnan, Krislert Samphantharak, Robert M Townsend, and Diego Vera-Cossio (2024), “Propagation and Insurance in Village Networks." American Economic Review 114(1): 252–84.

Robert M. Townsend (1995), “Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies." Journal of Economic Perspectives 9(3): 83–102.

**Faith Guvenen et al. (2017), “Worker Betas: Five Facts about Systematic Earnings Risk." American Economic Review 107(5): 398–403.

**Mathias Dolls (2019), “An Unemployment Re-insurance Scheme for the Eurozone? Stabilizing and Redistributive Effects.” European Economic Review 170: 104872.

**Gary Gorton (2024) “Inland Bills of Exchange: Private Money Production without Banks.” Explorations in Economic History 92.

**Walter Bagehot (1873), Lombard Street: A Description of the Money Market. Henry S. King & Co.

**Thomas J. Sargent and Neil Wallace (1982), “The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration.” Journal of Political Economy 90(6): 1212–1236.

**Analog Insights (2024), “What Is Liquidity Fragmentation and Why It’s Killing DeFi." Medium.com, 10 Jan 2024.

**Nikhil George, Thaddeus Dryja, and Neha Narula (2023), “A Framework for Programmability in Digital Currency.” Working paper, MIT Digital Currency Initiative.

### Lecture 5: Tokenized and Programmable Assets

#### Topics: Dynamic Ledgers; Platforms; Atomic Trade and Settlement; Legacy Systems and Trade Fails

*Michael Junho Lee, Antoine Martin, and Robert M. Townsend (2024), “Optimal Design of Tokenized Markets” (PDF). Federal Reserve Bank of New York Staff Reports, no. 1121.

Michael Junho Lee, Antoine Martin, and Robert M. Townsend (2024), “Zero Settlement Risk Token Systems” (PDF). Federal Reserve Bank of New York Staff Reports, no. 1120.

Nathan Reiff (2024), “What Are ERC-20 Tokens on the Ethereum Network?” Investopedia.com, updated 6 April 2025.

JP Morgan (2023), “Transforming the Way Money, Information, and Assets Move around the World.” Jpmorgan.com.

**Bank of Thailand (undated), Inthanon Phase 2 report (PDF).

**Euroclear (undated), “Pioneering in the DLT landscape with Fnality." Euroclear.com.

**Michael J. Fleming and Kenneth D. Garbade (2005), “Explaining Settlement Fails” (PDF). Federal Reserve Bank of New York / Current Issues in Economics and Finance 11(9).

**Bank for International Settlements, SIX Group and Swiss National Bank (2022), “Project Helvetia Phase 2: Settling Tokenised Assets in Wholesale CBDC." BIS.org, 13 January 2022.

**Alexander Lee (2021), “What Is Programmable Money?” United States Federal Reserve / FEDS Notes, 23 June 2021.

BIS Committee on Payments and Market Infrastructures (2019), “Wholesale Digital Tokens.” CPMI paper #190.

Tobias Adrian et al. (2022), “A Multi-Currency Exchange and Contracting Platform.” IMF Working Paper No. WP/22/217.

Victor Orestes and Robert M. Townsend (2023), “Brazil’s Central Bank Digital Currency: Improving Financial Infrastructure with Programmability.” LIFT Papers No. 5, Banco Central do Brasil.

### Lecture 6: Multilateral Trade Credit Set-Off (MTCS) (Guest lecturer Tomaž Fleischman, Informal Systems)

#### Topics: Improving Financial Infrastructure; Network Cycles and Chains; Algorithms to Maximize Timely Payment with Multilateral Trade Credit Set-Offs

**Tomaž Fleischman, Paolo Dini, and Giuseppe Littera (2020), “Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis.” Journal of Risk and Financial Management 13(12): 295.

Tomaž Fleischman and Paolo Dini (2021), “Mathematical Foundations for Balancing the Payment System in the Trade Credit Model." Journal of Risk and Financial Management 14(9): 452.

Frederic Boissay et al. (undated). “Multilateral Trade Credit Setoff.” BIS Working Paper (forthcoming).

**Lars Borner and John William Hatfield (2017), “The Design of Debt-Clearing Markets: Clearinghouse Mechanisms in Preindustrial Europe.” Journal of Political Economy 125(6 ): 1991–2037.

**Thomas H. Cormen et al. (2009), Introduction to Algorithms, third edition, part VI. MIT Press.

Daniel Aronoff and Robert M. Townsend (2023), “A Smart Contract to Increase Intermediation Capacity in the Repo Market.” Working paper, MIT.

### Lecture 7: Stochastic Financial Networks

#### Topics: Liquidity and the Value of Key Players versus Contagion Dynamics: Enhance or Limit Markets

*Arun G. Chandrasekhar, Robert M. Townsend, and Juan Pablo Xandri (2022), “Liquidity, Financial Centrality, and the Value of Key Players.” NBER Working Paper 30270.

**T. R. Hurd (2016), Contagion! Systemic Risk in Financial Networks. Springer.

**Martin Summer (2013), “Financial Contagion and Network Analysis.” Annual Review of Financial Economics 5(1): 277–297.

### Lecture 8: Mechanism Design, Incentives vs Protocols, Notions of Trust

#### Topics: Private Information; Incentives to Report and Take Actions; Byzantine Generals Problem; Differences between Economics and Computer Science approaches to Algorithms and Trust.

Robert M. Townsend (1993), The Medieval Village Economy, chapter 5. Princeton University Press.

*Stephen Morris and Hyun Song Shin (1997), “Approximate Common Knowledge and Co-ordination: Recent Lessons from Game Theory.” Journal of Logic, Language and Information 6(2): 171-190.

**Hao Chung and Elaine Shi (2022), “Foundations of Transaction Fee Mechanism Design.” submitted to Computer Science and Game Theory, SODA 2023.

**Raphael Auer, Cyril Monnet, and Hyun Song Shin (2023), “Distributed Ledgers and the Governance of Money." BIS Working Paper 924.

Tuomas Sandholm (2008), “Computing in Mechanism Design." In Steven N. Durlauf and Lawrence E. Blume (eds.), The New Palgrave Dictionary of Economics. Springer.

### Lecture 9: Modern Encryption: Key concepts

#### Topics: Public and Private Keys; Encoded Messages; Hashes; Cryptographic Puzzles; Fully Homomorphic Encryption; Multiparty Computation; Zero Knowledge Proofs.

*Robert M. Townsend, Nicolas X. Zhang, and Yinhong Zhao (2022), “A Primer on Encryption” (PDF). Working Paper.

**Ran Canetti, Amos Fiat, and Yannai A. Gonczarowski (2023), “Zero-Knowledge Mechanisms." Papers 2302.05590, arXiv.org.

Dfinity Internet Computer

Chainlink (2023), “What Are Cross-Chain Smart Contracts?" Chain.link, 9 August 2023.

**Wheatstones (2023), “JP Morgan & Apollo Test Tokenized Portfolios Using Public & Private Blockchains." Medium.com, 20 November 2023.

Ryan Zarick, Bryan Pellegrino, and Caleb Banister (2023), “LayerZero: Trustless inter-chain transactions” (PDF). LayerZero whitepaper.

Rosario La Rocca et al. (2022), “Integrating DLTs with Market Infrastructures: Analysis and Proof-of-Concept for Secure DvP between TIPS and DLT Platforms” (PDF). Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) paper, Banca di Italia (Bank of Italy).

Ava Labs (2020), Avalanche whitepapers.

Cosmos (2023), “What Is Cosmos?” (archived)

Gilad Asharovet al. (2012), “Multiparty Computation with Low Communication, Computation and Interaction via Threshold FHE.” In David Pointcheval and Thomas Johansson (eds.), Advances in Cryptology – EUROCRYPT 2012, 483–501. Springer.

### Lecture 10: Designs of Financial Infrastructure Utilizing Encryption

#### Topics: Auctions; Hybrid Credit and Insurance; Implementation of Cryptography on the Block Chain

*Robert M. Townsend and Nicolas X. Zhang (2021), “Innovative Financial Designs Utilizing Homomorphic Encryption and Multiparty Computation” (PDF). Working paper, MIT.

*Robert M. Townsend (1988), “Information Constrained Insurance: The Revelation Principle Extended." Journal of Monetary Economics 21(2–3), 411–450, selected sections.

**Edward J. Green and Ping Lin (2003), “Implementing Efficient Allocations in a Model of Financial Intermediation.” Journal of Economic Theory 109(1): 1–23.

**Bryan Routledge and Ariel Zelin Jones (2022), “Currency Stability Using Blockchain Technology." Journal of Economic Dynamics and Control 142: 104155.

Enrico Bottazzi1, Chan Nam Ngo, and Masato Tsutsumi (2024), “Multilateral Trade Credit Set-Off in MPC via Graph Anonymization and Network Simplex."

Daniel Aronoff et al. (2025), “SoK: Fully-Homomorphic Encryption in Smart Contracts” (PDF). Cryptology ePrint Archive paper 527.

**Raphael Auer (2022), “Embedded Supervision: How to Build Regulation into Decentralised Finance.” CESifo Working Paper No. 9771

**Emmanuel A. Abbe, Amir E. Khandani, and Andrew W. Lo (2012), “Privacy-Preserving Methods for Sharing Financial Risk Exposures.” American Economic Review 102(3): 65–70.

**Aysajan Abidin et al. (2016), “An MPC-Based Privacy-Preserving Protocol for a Local Electricity Trading Market.” In Foresti, S., Persiano, G. (eds.), Cryptology and Network Security. CANS 2016. Lecture Notes in Computer Science, vol 10052. Cham, Switzerland: Springer, 615–625.

Dan Bogdanov et al. (2016), “Students and Taxes: A Privacy-Preserving Study Using Secure Computation.” Proceedings on Privacy Enhancing Technologies 2016(3): 117–135.

Peter Bogetoft et al. (2009), “Secure Multiparty Computation Goes Live.” In Roger Dingledine and Philippe Golle (eds.), Financial Cryptography and Data Security. Springer.

Leo de Castro et al. (2020), “SCRAM: A Platform for Securely Measuring Cyber Risk.” Harvard Data Science Review 2(3).

### Lecture 11: Implementing Market Mechanisms with Algorithmic Game Theory

#### Topics: The Synthesis of Econ and CS: Building Markets; Computationally Feasible Algorithms from Nash to Correlated Equilibria to Coarse Correlated Equilibria

Pradeep Dubey (1982), “Price-Quantity Strategic Market Games.” Econometrica 50(1): 111–126.

Robert J. Aumann (1974), “Subjectivity and Correlation in Randomized Strategies." Journal of Mathematical Economics 1(1): 67–96.

Christos H. Papadimitriou and Tim Roughgarden (2008), “Computing Correlated Equilibria in Multi-Player Games." Journal of the Association for Computing Machinery. 55(3): 1–29.

Constantinos Daskalis, Paul W. Goldberg, and Christos H. Papadimitriou (2009), “The Complexity of Computing a Nash Equilibrium." SIAM Journal on Computing 39(1).

Geoffrey Ramseyer, Ashish Goel, and David Mazières (2023), “SPEEDEX: A Scalable, Parallelizable, and Economically Efficient Decentralized EXchange” (PDF). Conference paper, 20th USENIX Symposium on Networked Systems Design and Implementation, April 17–19, 2023, Boston, MA, USA.

## Course Info

### Instructor

- Prof. Robert M. Townsend

### Departments

- Economics

### As Taught In

Spring 2025

### Level

Graduate

### Topics

- Social Science
  - Economics
    - Financial Economics

### Learning Resource Types

notes Lecture Notes
theaters Lecture Videos

Browse Resources

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