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Mechanism Design with Blockchain Enforcement

Author

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  • Hitoshi Matsushima

    (Department of Economics, University of Tokyo)

  • Shunya Noda

    (Vancouver School of Economics, University of British Columbia)

Abstract

We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that, any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract.

Suggested Citation

  • Hitoshi Matsushima & Shunya Noda, 2020. "Mechanism Design with Blockchain Enforcement," KIER Working Papers 1027, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1027
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hitoshi Matsushima & Shunya Noda, 2020. "Epistemological Mechanism Design (Revised version of CARF-F-496)," CARF F-Series CARF-F-498, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Feb 2021.
    2. Matsushima, Hitoshi, 2022. "Epistemological implementation of social choice functions," Games and Economic Behavior, Elsevier, vol. 136(C), pages 389-402.
    3. Kunimoto, Takashi & Zhang, Cuiling, 2022. "Efficient bilateral trade via two-stage mechanisms: Comparison between one-sided and two-sided asymmetric information environments," Journal of Mathematical Economics, Elsevier, vol. 101(C).
    4. Hitoshi Matsushima & Shunya Noda, 2020. "Unique Information Elicitation," CARF F-Series CARF-F-496, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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    More about this item

    Keywords

    Implementation; Decentralized Mechanism; Smart Contract; Oracle Problem; Self-Judgment;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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