Decentralized Payment Clearing using Blockchain and Optimal Bidding

32 Pages Posted: 2 Sep 2021 Last revised: 10 Jan 2022

See all articles by Hamed Amini

Hamed Amini

Georgia State University

Maxim Bichuch

Johns Hopkins University

Zachary Feinstein

Stevens Institute of Technology - School of Business

Date Written: August 31, 2021

Abstract


In this paper, we construct a decentralized clearing mechanism which endogenously and automatically provides a claims resolution procedure. This mechanism can be used to clear a network of obligations through blockchain. In particular, we investigate default contagion in a network of smart contracts cleared through blockchain. In so doing, we provide an algorithm which constructs the blockchain so as to guarantee the payments can be verified and the miners earn a fee. We, additionally, consider the special case in which the blocks have unbounded capacity to provide a simple equilibrium clearing condition for the terminal net worths; existence and uniqueness are proven for this system. Finally, we consider the optimal bidding strategies for each firm in the network so that all firms are utility maximizers with respect to their terminal wealths. We first look for a mixed Nash equilibrium bidding strategies, and then also consider Pareto optimal bidding strategies. The implications of these strategies, and more broadly blockchain, on systemic risk are considered.

Keywords: blockchain; decentralized finance; decentralized clearing; default contagion; systemic risk

JEL Classification: C72, G10, G32,

Suggested Citation

Amini, Hamed and Bichuch, Maxim and Feinstein, Zachary, Decentralized Payment Clearing using Blockchain and Optimal Bidding (August 31, 2021). Available at SSRN: https://ssrn.com/abstract=3915103 or http://dx.doi.org/10.2139/ssrn.3915103

Hamed Amini (Contact Author)

Georgia State University ( email )

Georgia State University
Atlanta, GA 30303
United States

Maxim Bichuch

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Zachary Feinstein

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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