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Settlement and Blockchain Equilibria

Author

Listed:
  • Zahra Ebrahimi

    (Carnegie Mellon University)

  • Ariel Zetlin-Jones

    (Carnegie Mellon University)

  • Bryan Routledge

    (Carnegie Mellon University)

Abstract

Existing blockchain protocols based on the proof-of-work consensus mechanism, such as Bitcoin, necessarily feature a time lag of roughly one hour before users can ``trust'' the information on the blockchain. In Bitcoin, this lag results in a settlement lag before parties are willing to exchange real goods and services in exchange for tokens. The time delay plays a key role in securing the data on the blockchain from malicious attacks or those attempting to overwrite the history of the data. However, this time delay is not sufficient to secure the data from attacks when the value of transactions supported by the blockchain becomes sufficiently large. In this paper, we show how the settlement lag may be used to develop a new consensus mechanism which significantly improves the security of blockchain data and, in some cases, eliminates theoretical limitations on the economic value of transactions supported by blockchains. We further demonstrate how to optimize the settlement lag to maintain security while ensuring the usefulness of the blockchain to facilitate transactional services.

Suggested Citation

  • Zahra Ebrahimi & Ariel Zetlin-Jones & Bryan Routledge, 2019. "Settlement and Blockchain Equilibria," 2019 Meeting Papers 650, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:650
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    References listed on IDEAS

    as
    1. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    2. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
    3. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
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