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Settlement and Blockchain Equilibria

Zahra Ebrahimi, Ariel Zetlin-Jones and Bryan Routledge
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Zahra Ebrahimi: Carnegie Mellon University
Ariel Zetlin-Jones: Carnegie Mellon University
Bryan Routledge: Carnegie Mellon University

No 650, 2019 Meeting Papers from Society for Economic Dynamics

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.

Date: 2019
New Economics Papers: this item is included in nep-pay
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