Permissioned Distributed Ledgers and the Governance of Money

64 Pages Posted: 17 Feb 2021

See all articles by Raphael Auer

Raphael Auer

Bank for International Settlements (BIS)

Cyril Monnet

University of Bern

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: January 27, 2021

Abstract

We explore the economics and optimal design of “permissioned” distributed ledger technology (DLT) in a credit economy. Designated validators verify transactions and update the ledger at a cost that is derived from a supermajority voting rule, thus giving rise to a public good provision game. Without giving proper incentives to validators, however, their records cannot be trusted because they cannot commit to verifying trades and they can accept bribes to incorrectly validate histories. Both frictions challenge the integrity of the ledger on which credit transactions rely. In this context, we examine the conditions under which the process of permissioned validation supports decentralized exchange as an equilibrium, and analyze the optimal design of the trade and validation mechanisms. We solve for the optimal fees, number of validators, supermajority threshold and transaction size. A stronger consensus mechanism requires higher rents be paid to validators. Our results suggest that a centralized ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralized ledger.

Keywords: digital currencies, money, distributed ledger, blockchain, coordination game, global game, consensus, market design

JEL Classification: C72, C73, D4, E42, G2, L86

Suggested Citation

Auer, Raphael and Monnet, Cyril and Shin, Hyun Song, Permissioned Distributed Ledgers and the Governance of Money (January 27, 2021). Available at SSRN: https://ssrn.com/abstract=3770075 or http://dx.doi.org/10.2139/ssrn.3770075

Raphael Auer

Bank for International Settlements (BIS) ( email )

Cyril Monnet

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Hyun Song Shin (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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