No Trade in a Blockchain

Abstract

We show that there cannot be common knowledge trade in a truly decentralised environment, such as in a blockchain. A trade is an agreement to buy and sell a security that pays according to some state of nature; it is settled when the security’s value is verified by an oracle, an intermediary who knows the state of nature. However, since the identity of traders in a blockchain is hidden, an oracle can impersonate a trader, by participating in a trade only when he knows that the outcome will be favourable. If other traders know that this is possible, they might be unwilling to participate in any trade that is offered. In other words, anonymity of traders is incompatible with verifiability of trades. We find that the requirement on verifiability is relatively mild. In particular, it is enough that, among all values of the security that it is common knowledge that some trader thinks are possible, there exists an oracle that can verify either the maximum or the minimum.

Keywords: Blockchain, cryptocurrencies, oracles, no trade, agreeing to disagree

JEL Classification: D82, D83, D84, G14, G41