These projects would fail to receive financing. Investment and, ultimately, growth would be lower  4  BIS central bankers’ speeches  than optimal. In fact, the potential capital misallocation problem is greater still. To see that, consider the three projects summarised in Table 1. Table 1 Short-termism and capital planning Project  A  B  C  Cash-flows (CF)  $ pa in years 6–10  $ pa every year  $ pa in years 1–5  Cumulative CF  $  $  $  NPV (rational)  $  $  $  1  2  3  $  $  $  3  2  1  Ranking (rational) NPV (myopia) Ranking (myopia)  In the absence of short-termism, project A is selected. Its payouts are back-loaded but significant; it generates a net excess return of 22%.17 Short-termism hits such long duration projects hardest. The impatient investor chooses project C. This project delivers lower cashflows but these are front-loaded. In NPV terms, the project selected is the worst on offer, whereas the rationally optimal project ranks last. Capital allocation is not just sub-optimally low; it is also skewed towards sub-optimally short-duration projects. (b)  Asset pricing  Consider now a formal model of multi-period equity price determination. Finance theory typically assumes that investors care about both the level and uncertainty of their wealth and are risk averse. In this world, agents require a premium to invest in a company.
These mechanisms can take various forms, but all seek to offer sufficient certainty to system participants as to the correct status of the transaction ledger at any moment in time. One of the most well-known tools is the so-called proof-of-work or PoW, which requires complex and costly – primarily in energy consumption – computational calculations. It is precisely this latter aspect which is expected to deter irregular behaviour on the part of validators. However, the price of electricity, concerns about the environmental impact, the limited access to the specialised hardware required and scalability problems are some of the factors that are encouraging gradual migration to other types of solutions.8 Proof-of-stake or PoS is one such alternative. Its main characteristic is that validators are selected according to their direct economic stake in the network; in other words, depending on the amount of crypto-assets they own and must block to ensure that the operation is validated correctly. As they have a direct interest in preserving the value of the crypto-asset, in principle, this mechanism creates incentives to behave honestly. Moreover, as the possibility of their being assigned operations is generally connected with the volume of crypto-assets blocked, the network is less decentralised than under the other mechanisms. Although there are more options, where blockchain networks are set up as closed circuits (permissioned networks), a third mechanism, dubbed proof-of-authority or PoA, is generally prominent.