Market Design for a Blockchain-Based Financial System

6 Pages Posted: 24 Jun 2019

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Calibra, Inc.; National Bureau of Economic Research (NBER)

Ravi Jagadeesan

Harvard University- Department of Mathematics

Scott Duke Kominers

Harvard University

Date Written: June 18, 2019

Abstract

We develop a theory of long-run equilibrium in blockchain-based financial systems. Our theory elucidates the key market design features that separate proof of work and proof of stake approaches in the long run. Under proof of work, wasteful computation is used to secure the system, and users' utility in equilibrium is determined by the threat of a fork. Under proof of stake, by contrast, users' utility in equilibrium is generally above the fork threat level because custodians can use relational contracts to incentivize a higher quality of service. Relational contracts under proof of stake rely only on local institutions - but combining them with cryptography can create a platform for formal global contracts.

Keywords: market design, blockchain, decentralization, cryptocurrency, proof of stake, proof of work

Suggested Citation

Catalini, Christian and Jagadeesan, Ravi and Kominers, Scott Duke, Market Design for a Blockchain-Based Financial System (June 18, 2019). Available at SSRN: https://ssrn.com/abstract=3396834 or http://dx.doi.org/10.2139/ssrn.3396834

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty-and-research/faculty-directory/detail/?id=58777

Calibra, Inc.

1 Hacker Way
Menlo Park, CA 94025
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ravi Jagadeesan

Harvard University- Department of Mathematics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Scott Duke Kominers

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

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