Building trust takes time: limits to arbitrage for blockchain-based assets

【Author】 Hautsch, Nikolaus; Scheuch, Christoph; Voigt, Stefan

【Source】REVIEW OF FINANCE

【Abstract】A blockchain replaces central counterparties with time-consuming consensus protocols to record the transfer of ownership. This settlement latency slows cross-exchange trading, exposing arbitrageurs to price risk. Off-chain settlement, instead, exposes arbitrageurs to costly default risk. We show with Bitcoin network and order book data that cross-exchange price differences coincide with periods of high settlement latency, asset flows chase arbitrage opportunities, and price differences across exchanges with low default risk are smaller. Blockchain-based trading thus faces a dilemma: Reliable consensus protocols require time-consuming settlement latency, leading to arbitrage limits. Circumventing such arbitrage costs is possible only by reinstalling trusted intermediation, which mitigates default risk.

【Keywords】arbitrage; blockchain; market frictions; G00; G10; G14

【发表时间】2024

【收录时间】2024-08-29

【文献类型】Article; Early Access

【论文大主题】FT50 / UTD24

【论文小主题】共识机制

【影响因子】5.059