Mechanism Design with Blockchain Enforcement

44 Pages Posted: 10 Apr 2020

See all articles by Hitoshi Matsushima

Hitoshi Matsushima

University of Tokyo - Faculty of Economics

Shunya Noda

Vancouver School of Economics, University of British Columbia

Date Written: March 14, 2020

Abstract

We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract.

Keywords: Implementation, Decentralized Mechanism, Smart Contract, Oracle Problem, Self-Judgment

JEL Classification: D47, D82, L86

Suggested Citation

Matsushima, Hitoshi and Noda, Shunya, Mechanism Design with Blockchain Enforcement (March 14, 2020). Available at SSRN: https://ssrn.com/abstract=3554512 or http://dx.doi.org/10.2139/ssrn.3554512

Hitoshi Matsushima

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Shunya Noda (Contact Author)

Vancouver School of Economics, University of British Columbia ( email )

6000 Iona Dr
Vancouver, British Columbia V6T 1L4
Canada

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