Optimal Design of Tokenized Markets
28 Pages Posted: 7 Apr 2021 Last revised: 18 Feb 2022
Date Written: March 1, 2021
Trades in today’s financial system are inherently subject to settlement uncertainty. This paper explores tokenization as a potential technological solution. A token system, by enabling programmability of assets, can be designed to eradicate settlement uncertainty. We study the allocations achieved in a decentralized market with either the legacy settlement system or a token system. Tokenization can improve efficiency in markets subject to a limited commitment problem. However, it also materially alters the information environment, which in turn aggravates a hold-up problem. This limits potential gains from resolving settlement uncertainty, particularly for markets that depend on intermediaries.
Keywords: token system, security tokenization, settlement uncertainty, market design
JEL Classification: D47, G00, G29
Suggested Citation: Suggested Citation