Optimal Smart Contracts with Costly Verification

14 Pages Posted: 20 Jun 2019 Last revised: 29 Jul 2019

See all articles by Akaki Mamageishvili

Akaki Mamageishvili

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Jan Christoph Schlegel

City, University of London

Date Written: July 21, 2019

Abstract

We study optimal smart contract design for monitoring an exchange of an item performed offline. There are two parties, a seller and a buyer. Exchange happens off-chain, but the status update takes place on-chain. The exchange can be verified but with a cost. To guarantee self-enforcement of the smart contract, both parties make a deposit and the deposits must cover payments made in all possible final states. Both parties have an (opportunity) cost of making deposits. We discuss two classes of contract: In the first, the contract only interacts with the seller, while in the second, the contract can also interact with the buyer. In both cases, we derive optimal contracts specifying optimal deposits and verification policies.

Keywords: Smart Contracts, Deposit Design, Costly State Verification

JEL Classification: C72, D82, D86

Suggested Citation

Mamageishvili, Akaki and Schlegel, Jan Christoph, Optimal Smart Contracts with Costly Verification (July 21, 2019). Available at SSRN: https://ssrn.com/abstract=3404171 or http://dx.doi.org/10.2139/ssrn.3404171

Akaki Mamageishvili (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Jan Christoph Schlegel

City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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