Decentralized payment clearing using blockchain and optimal bidding

Hamed Amini, Maxim Bichuch, Zachary Feinstein

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

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 show that a pure strategy Nash equilibrium need not exist, and then look for mixed Nash equilibrium bidding strategies. The implications of these strategies, and more broadly blockchain, on systemic risk are considered.

Original languageEnglish
Pages (from-to)409-420
Number of pages12
JournalEuropean Journal of Operational Research
Volume309
Issue number1
DOIs
StatePublished - 16 Aug 2023

Keywords

  • Blockchain
  • Decentralized clearing
  • Decentralized finance
  • Finance
  • Systemic risk

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