Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets

49 Pages Posted: 2 Jan 2019 Last revised: 13 Oct 2023

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research

Christoph Scheuch

wikifolio Financial Technologies AG

Stefan Voigt

University of Copenhagen; Danish Finance Institute

Date Written: January 29, 2021

Abstract

A blockchain replaces central counterparties with time-consuming consensus protocols to record the transfer of ownership.
This settlement latency slows cross-exchange trading, exposing arbitrageurs to price risk.
Off-chain settlement, instead, exposes arbitrageurs to costly default risk.
We show with Bitcoin network and order book data that cross-exchange price differences coincide with periods of high settlement latency, asset flows chase arbitrage opportunities, and price differences across exchanges with low default risk are smaller.
Blockchain-based trading thus faces a dilemma: Reliable consensus protocols require time-consuming settlement latency, leading to arbitrage limits. Circumventing such arbitrage costs is possible only by reinstalling trusted intermediation, which mitigates default risk.

Keywords: Arbitrage, Blockchain, Market Frictions

JEL Classification: G00, G10, G14

Suggested Citation

Hautsch, Nikolaus and Scheuch, Christoph and Voigt, Stefan, Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets (January 29, 2021). 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

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

Kolingasse 14
Vienna, A-1090
Austria

Christoph Scheuch

wikifolio Financial Technologies AG ( email )

Berggasse 31
Vienna, 1090
Austria

Stefan Voigt (Contact Author)

University of Copenhagen ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

HOME PAGE: http://voigtstefan.me

Danish Finance Institute ( email )

Copenhagen

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