Building Trust Takes Time: Limits to Arbitrage in Blockchain-Based Markets

52 Pages Posted: 2 Jan 2019 Last revised: 25 Mar 2020

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Christoph Scheuch

Vienna Graduate School of Finance (VGSF); WU (Vienna University of Economics and Business)

Stefan Voigt

WU Wien; Vienna Graduate School of Finance (VGSF)

Date Written: March 25, 2020

Abstract

Distributed ledger technologies replace trusted clearing counterparties and security depositories with time-consuming consensus protocols to record the transfer of ownership. This settlement latency exposes cross-market arbitrageurs to price risk. We theoretically derive arbitrage bounds that increase with expected latency, latency uncertainty, volatility and risk aversion. Using Bitcoin orderbook and network data, we estimate arbitrage bounds of on average 121 basis points, explaining 91% of the observed cross-market price differences. Consistent with our theory, periods of high latency-implied price risk exhibit large price differences, while asset flows chase arbitrage opportunities. Blockchain-based settlement thus introduces a non-trivial friction that impedes arbitrage activity.

Keywords: Arbitrage, Market Frictions, Blockchain

JEL Classification: G00, G10, G14

Suggested Citation

Hautsch, Nikolaus and Scheuch, Christoph and Voigt, Stefan, Building Trust Takes Time: Limits to Arbitrage in Blockchain-Based Markets (March 25, 2020). CFS Working Paper, No. 616, 2018. Available at SSRN: https://ssrn.com/abstract=3302159 or http://dx.doi.org/10.2139/ssrn.3302159

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Christoph Scheuch

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, A-1020
Austria

HOME PAGE: http://christophscheuch.github.io/

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, A-1020
Austria

HOME PAGE: http://bach.wu.ac.at/d/research/ma/14198/

Stefan Voigt

WU Wien ( email )

Welthandelsplatz 1
Building D4.4.171
Vienna, 1020
Austria

HOME PAGE: http://www.vgsf.ac.at/voigt

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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