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Science Journals — AAAS Lucchini et al., Sci. Adv. 2020; 6 : eabd2204 16 December 2020 S C I E N C E A D V A N C E S | R E S E A R C H A R T I C L E 1 of 6 N E T W O R K S C I E N C E From code to market: Network of developers and correlated returns of cryptocurrencies Lorenzo Lucchini1,2, Laura Alessandretti3,4, Bruno Lepri1, Angela Gallo5, Andrea Baronchelli6,7,8* “Code is law” is the founding principle of cryptocurrencies. The security, transferability, availability, and other properties of crypto-assets are determined by the code through which they are created. If code is open source, as is customary for cryptocurrencies, this would prevent manipulations and grant transparency to users and traders. However, this approach considers cryptocurrencies as isolated entities, neglecting possible connections between them. Here, we show that 4% of developers contribute to the code of more than one cryptocurrency and that the market reflects these cross-asset dependencies. In particular, we reveal that the first coding event linking two cryptocurrencies through a common developer leads to the synchronization of their returns. Our results identify a clear link between the collaborative development of cryptocurrencies and their market behavior. More broadly, they reveal a so-far overlooked systemic dimension for the transparency of code-based ecosystems that will be of interest for researchers, investors, and regulators. INTRODUCTION A cryptocurrency is a digital asset designed to work as a medium of exchange. The underlying Blockchain technology allows transactions to be validated in a decentralized way, without the need for any inter- mediary (1). Every cryptocurrency is entirely defined and governed by its code, which determines its security, functionality, availability, transferability, and general malleability (2). This “code is law” archi- tecture immediately puts developers under the spotlight (3). Lack of transparency in the coding process might damage users and other stakeholders of the code (4). “Open code” is identified as the antidote to lack of transparency (3). Even if the code is accessible to only a small fraction of users, the reasoning goes, it would protect the asset and stakeholders from manipulations (5). For this reason, the code of the vast majority of cryptocurrencies is stored in public repositories. GitHub alone cur- rently stores the code of more than 1600 cryptocurrencies (6). Cryptocurrencies are nowadays used both as originally intended, i.e., media of exchange for daily payments and, to a larger extent, for speculation (7, 8). The market value of a cryptocurrency is not based on any tangible asset, resulting in an extremely volatile, and largely unregulated, market (9–11). However, the cryptocurrency market has attracted private and institutional investors (12, 13). At the moment of writing, more than 3000 cryptocurrencies are traded, capitalizing together more than 200 billion dollars (14, 15). Here, we challenge the view that open code grants transparency to cryptocurrencies, even accepting that literate users do check it carefully (which is, of course, far from obvious). We do so by ana- lyzing 298 cryptocurrencies (i) whose code is stored in GitHub and (ii) whose daily trading volume has been, on average, larger than 105 U.S. dollars (USD) (16) during their lifetime. We show the following: 1) A substantial fraction of developers (4%) contributes to the code of two or more cryptocurrencies. Hence, cryptocurrencies are not isolated entities but rather form a network of intercon- nected codes. 2) The temporal evolution of the network of co-coded crypto- currencies anticipates market behavior. In particular, the first time two independent codes get connected via the activity of one shared developer marks, on average, a period of increased correlation be- tween the returns of the corresponding cryptocurrencies. Thus, the temporal dynamics of co-coding of cryptocurrencies provides insights on market behaviors that could not be deduced on the basis of the combined knowledge of the code of single currencies and the present state of the market itself. In other words, transparency, i.e., the availability of relevant market information to market partic- ipants, is a systemic property. The whole network of cryptocurren- cies should be considered both by regulators and by professional investors aiming to maximize portfolio diversification. From this point of view, our work contributes a new dimension to the litera- ture focused on the properties of the cryptocurrency market, which has, so far, adopted approaches ranging from financial (17–21) to behavioral (22) and from evolutionary (21, 23, 24) to technological (25, 26) perspectives. RESULTS GitHub activity and the network of cryptocurrencies We are interested in the coding and market activity concerning actively traded cryptocurrencies (see Methods). The 298 crypto- currencies with trading volume larger than 100,000 USD whose code is stored on GitHub (298 projects) include 63 of the top 100 cryptocurrencies, ranked by average market capitalization during October 2019. A total of 6341 developers contributed to these GitHub projects, totaling 879,742 edits (see section S1.2 for more details). The number of developers working on a cryptocurrency project correlates positively with its market capitalization (Spearman correlation coefficient, 0.48, with P <0.0001; see="" fig.="" s2a),="" as="" previ-="" ously="" noted="" (6).="" 1fondazione="" bruno="" kessler,="" trento="" 38123,="" italy.="" 2department="" of="" information="" engi-="" neering="" and="" computer="" science,="" university="" of="" trento,="" trento="" 38123,="" italy.="" 3copenhagen="" center="" for="" social="" data="" science,="" university="" of="" copenhagen,="" øster="" farimagsgade="" 5,="" copenhagen="" k="" 1353,="" denmark.="" 4technical="" university="" of="" denmark,="" kgs.="" lyngby="" dk-="" 2800,="" denmark.="" 5department="" of="" finance,="" cass="" business="" school,="" city="" university="" of="" london,="" london="" ec1y="" 8tz,="" uk.="" 6department="" of="" mathematics,="" city="" university="" of="" london,="" london="" ec1y="" 8tz,="" uk.="" 7ucl="" centre="" for="" blockchain="" technologies,="" university="" college="" london,="" london,="" uk.="" 8the="" alan="" turing="" institute,="" british="" library,="" 96="" euston="" road,="" london="" nw12db,="" uk.="" *corresponding="" author.="" email:=""
[email protected]="" copyright="" ©="" 2020="" the="" authors,="" some="" rights="" reserved;="" exclusive="" licensee="" american="" association="" for="" the="" advancement="" of="" science.="" no="" claim="" to="" original="" u.s.="" government="" works.="" distributed="" under="" a="" creative="" commons="" attribution="" noncommercial="" license="" 4.0="" (cc="" by-nc).="" on="" a="" ugust="" 4,="" 2021="" http://advances.sciencem="" ag.org/="" d="" ow="" nloaded="" from="" http://advances.sciencemag.org/="" lucchini="" et="" al.,="" sci.="" adv.="" 2020;="" 6="" :="" eabd2204="" 16="" december="" 2020="" s="" c="" i="" e="" n="" c="" e="" a="" d="" v="" a="" n="" c="" e="" s="" |="" r="" e="" s="" e="" a="" r="" c="" h="" a="" r="" t="" i="" c="" l="" e="" 2="" of="" 6="" the="" activity="" of="" the="" developers="" is="" heterogeneous.="" twenty-eight="" percent="" of="" developers="" focused="" only="" on="" the="" top="" 10="" cryptocurrencies,="" producing="" 20%="" of="" the="" edits,="" while="" only="" 15%="" of="" the="" developers="" worked="" only="" on="" projects="" with="" a="" capitalization="" lower="" than="" the="" median="" capitalization="" of="" the="" market,="" producing="" only="" 11%="" of="" the="" developing="" events.="" the="" ethereum="" community="" soars="" above="" the="" others="" in="" terms="" of="" editing="" activity="" (109,527="" development="" events),="" while="" bitcoin="" has="" the="" largest="" number="" of="" developers,="" 832="" (fig.="" s1).="" in="" general,="" the="" number="" of="" developers="" and="" the="" number="" of="" edits="" for="" a="" given="" project="" strongly="" correlate="" (spearman="" correlation="" coefficient,="" 0.92,="" with="" p=""><0.0001; see fig. s2b). we find that 4% of developers contributed to more than one cryptocurrency and are responsible for 10% of all edits. we further investigate their role by representing the github data as a bipartite network, where developers and cryptocurrencies (the nodes) are connected by edit events (the links; fig. 1a). we then project the bipartite network and obtain the network of connected crypto- currencies where cryptocurrencies are nodes, and a link exists be- tween them if they share at least one developer (fig. 1b). we find that this network has 204 links, activated first by 147 different developers, and 123 nonisolated nodes, of which 115 form a giant component. bitcoin has the largest number of connections, 53, followed by ethereum with 43. the remaining 175 projects do not share any developer (fig. 1c). the presence of a small fraction of developers who contributed to more than two cryptocurrencies (22 of 147) makes the network rich in cliques (see section s1.3 for more analyses on the network). market synchronization of github-linked cryptocurrencies we now consider the temporal evolution of the cryptocurrency network over 5 years of coding activity (from 5 march 2014 to 30 may 2019). a link between two cryptocurrencies is created the first time that a developer of one of the two edits the other (fig. 2a), referred in the following as the github connection time. what happens to the market behavior of the two cryptocurrencies that have just been linked in the github network? we focus on the correlation between asset returns (40, 41). we rescale time so that the connection time corresponds to d = 0 for each pair of github-linked currencies, and we measure the spearman correlation over a backward rolling window of size s = 4 months [see figs. 2 (b and c) and fig. 3a and methods for definitions; results are robust with respect to variations of this definition; see section s1.4]. to limit the effect of overall changes in market evolu- tion, we standardize the value of the spearman correlation, for a given pair of linked currencies and at a given time, by subtracting the aver- age correlation across all possible pairs of currencies at that time and dividing by the corresponding sd (see methods). figure 3a shows that the average standardized spearman cor- relation between the returns of two linked cryptocurrencies, aver- aged over the set of 204 linked pairs, increases at the turn of the github connection time, rising from 0.31 ± 0.01, on average (±sem), in the 4 months before the connection time, to 0.66 ± 0.01, in the period included between 2.5 and 6.5 months after the connec- tion time [fig. 3a, significant under welch test (42, 43), with p = 0.02). this corresponds to a relative increase of almost 130% after the synchronization occurred (see section s1.9.2 for details about the synchronization period). this result is robust to major pertur- bations of the network, including the removal of bitcoin or/and ethereum from it (fig. see="" fig.="" s2b).="" we="" find="" that="" 4%="" of="" developers="" contributed="" to="" more="" than="" one="" cryptocurrency="" and="" are="" responsible="" for="" 10%="" of="" all="" edits.="" we="" further="" investigate="" their="" role="" by="" representing="" the="" github="" data="" as="" a="" bipartite="" network,="" where="" developers="" and="" cryptocurrencies="" (the="" nodes)="" are="" connected="" by="" edit="" events="" (the="" links;="" fig. 1a).="" we="" then="" project="" the="" bipartite="" network="" and="" obtain="" the="" network="" of="" connected="" crypto-="" currencies="" where="" cryptocurrencies="" are="" nodes,="" and="" a="" link="" exists="" be-="" tween="" them="" if="" they="" share="" at="" least="" one="" developer="" (fig. 1b).="" we="" find="" that="" this="" network="" has="" 204="" links,="" activated="" first="" by="" 147="" different="" developers,="" and="" 123="" nonisolated="" nodes,="" of="" which="" 115="" form="" a="" giant="" component.="" bitcoin="" has="" the="" largest="" number="" of="" connections,="" 53,="" followed="" by="" ethereum="" with="" 43.="" the="" remaining="" 175="" projects="" do="" not="" share="" any="" developer="" (fig. 1c).="" the="" presence="" of="" a="" small="" fraction="" of="" developers="" who="" contributed="" to="" more="" than="" two="" cryptocurrencies="" (22="" of="" 147)="" makes="" the="" network="" rich="" in="" cliques="" (see="" section="" s1.3="" for="" more="" analyses="" on="" the="" network).="" market="" synchronization="" of="" github-linked="" cryptocurrencies="" we="" now="" consider="" the="" temporal="" evolution="" of="" the="" cryptocurrency="" network="" over="" 5="" years="" of="" coding="" activity="" (from="" 5="" march="" 2014="" to="" 30="" may="" 2019).="" a="" link="" between="" two="" cryptocurrencies="" is="" created="" the="" first="" time="" that="" a="" developer="" of="" one="" of="" the="" two="" edits="" the="" other="" (fig. 2a),="" referred="" in="" the="" following="" as="" the="" github="" connection="" time.="" what="" happens="" to="" the="" market="" behavior="" of="" the="" two="" cryptocurrencies="" that="" have="" just="" been="" linked="" in="" the="" github="" network?="" we="" focus="" on="" the="" correlation="" between="" asset="" returns="" (40, 41).="" we="" rescale="" time="" so="" that="" the="" connection="" time="" corresponds="" to="" d="0" for="" each="" pair="" of="" github-linked="" currencies,="" and="" we="" measure="" the="" spearman="" correlation="" over="" a="" backward="" rolling="" window="" of="" size="" s="4" months="" [see="" figs. 2 (b and c)="" and="" fig. 3a="" and="" methods="" for="" definitions;="" results="" are="" robust="" with="" respect="" to="" variations="" of="" this="" definition;="" see="" section="" s1.4].="" to="" limit="" the="" effect="" of="" overall="" changes="" in="" market="" evolu-="" tion,="" we="" standardize="" the="" value="" of="" the="" spearman="" correlation,="" for="" a="" given="" pair="" of="" linked="" currencies="" and="" at="" a="" given="" time,="" by="" subtracting="" the="" aver-="" age="" correlation="" across="" all="" possible="" pairs="" of="" currencies="" at="" that="" time="" and="" dividing="" by="" the="" corresponding="" sd="" (see="" methods).="" figure 3a="" shows="" that="" the="" average="" standardized="" spearman="" cor-="" relation="" between="" the="" returns="" of="" two="" linked="" cryptocurrencies,="" aver-="" aged="" over="" the="" set="" of="" 204="" linked="" pairs,="" increases="" at="" the="" turn="" of="" the="" github="" connection="" time,="" rising="" from="" 0.31="" ±="" 0.01,="" on="" average="" (±sem),="" in="" the="" 4="" months="" before="" the="" connection="" time,="" to="" 0.66="" ±="" 0.01,="" in="" the="" period="" included="" between="" 2.5="" and="" 6.5="" months="" after="" the="" connec-="" tion="" time="" [fig. 3a,="" significant="" under="" welch="" test="" (42, 43),="" with="" p="0.02)." this="" corresponds="" to="" a="" relative="" increase="" of="" almost="" 130%="" after="" the="" synchronization="" occurred="" (see="" section="" s1.9.2="" for="" details="" about="" the="" synchronization="" period).="" this="" result="" is="" robust="" to="" major="" pertur-="" bations="" of="" the="" network,="" including="" the="" removal="" of="" bitcoin="" or/and="" ethereum="" from="" it="">