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

55 Pages Posted: 2 Jan 2019 Last revised: 29 Jan 2021

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

wikifolio Financial Technologies AG

Stefan Voigt

University of Copenhagen; Danish Finance Institute

Date Written: January 29, 2021

Abstract

Distributed ledger technologies replace central counterparties with time-consuming
consensus protocols to record the transfer of ownership. This settlement latency
slows down cross-market trading and exposes arbitrageurs to price risk. We theoretically
derive arbitrage bounds induced by settlement latency. Using Bitcoin orderbook and network data, we estimate average arbitrage bounds of 121 basis points, explaining 91% of the cross-market price differences, and demonstrate that asset flows chase arbitrage opportunities. Controlling for inventory holdings as a measure of trust in exchanges does not affect our main results. Blockchain-based settlement without trusted intermediation thus introduces a non-trivial friction
that impedes arbitrage activity.

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 in Blockchain-Based Markets (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 (Contact Author)

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

Kolingasse 14
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Christoph Scheuch

wikifolio Financial Technologies AG ( email )

Berggasse 31
Vienna, 1090
Austria

Stefan Voigt

University of Copenhagen ( email )

Øster Farimasgade 5, Bygn 26
Copenhagen, 1353
Denmark

HOME PAGE: http://voigtstefan.me

Danish Finance Institute ( email )

Copenhagen

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