Incentive Compatibility on the Blockchain

15 Pages Posted: 14 Aug 2018

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Thorsten V. Koeppl

Queen's University - Department of Economics

Date Written: May 2018

Abstract

A blockchain is a digital ledger that keeps track of a record of ownership without the need for a designated party to update and enforce changes to the record. The updating of the ledger is done directly by the users of the blockchain and is traditionally governed by a proof-of-work (PoW) protocol. We formalize this protocol as a Cournot game where users compete to update the blockchain for a reward. Cheating occurs in the form of “double spending” when users try to tamper with ownership records in order to defraud their counterparties. Ruling out incentives to cheat can be summarized in the form of a “no double-spending constraint.” These constraints put restrictions on the design of a blockchain and, thus, play a role akin to incentive compatibility constraints in classic mechanism design.

Keywords: Digital Currencies, Economic models, Payment clearing and settlement systems

JEL Classification: G, G2, H, H4, P, P4, P43

Suggested Citation

Chiu, Jonathan and Koeppl, Thorsten V., Incentive Compatibility on the Blockchain (May 2018). Available at SSRN: https://ssrn.com/abstract=3221233 or http://dx.doi.org/10.2139/ssrn.3221233

Jonathan Chiu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Thorsten V. Koeppl

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

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