Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/242852 
Year of Publication: 
2021
Series/Report no.: 
Discussion Papers No. 21-01
Publisher: 
University of Bern, Department of Economics, Bern
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.
Subjects: 
digital currencies
money
distributed ledger
blockchain
coordination game
global game
consensus
market design
Money demand
unit roots
cointegration
structural VARs
natural rate of interest
JEL: 
C72
C73
D4
E42
G2
L86
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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