Mechanism Design with Blockchain Enforcement

Hitoshi Matsushima and Shunya Noda

No 1027, KIER Working Papers from Kyoto University, Institute of Economic Research

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.

Keywords: Implementation; Decentralized Mechanism; Smart Contract; Oracle Problem; Self-Judgment (search for similar items in EconPapers)
JEL-codes: D47 D82 L86 (search for similar items in EconPapers)
Pages: 44pages
Date: 2020-03
New Economics Papers: this item is included in nep-cta, nep-mic, nep-ore and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Mechanism Design with Blockchain Enforcement (2020)
Working Paper: Mechanism Design with Blockchain Enforcement (2020)
Working Paper: Mechanism Design with Blockchain Enforcement (2020)
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