TY - JOUR
T1 - Decentralized payment clearing using blockchain and optimal bidding
AU - Amini, Hamed
AU - Bichuch, Maxim
AU - Feinstein, Zachary
N1 - Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2023/8/16
Y1 - 2023/8/16
N2 - 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.
AB - 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.
KW - Blockchain
KW - Decentralized clearing
KW - Decentralized finance
KW - Finance
KW - Systemic risk
UR - http://www.scopus.com/inward/record.url?scp=85146303524&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85146303524&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2022.12.024
DO - 10.1016/j.ejor.2022.12.024
M3 - Article
AN - SCOPUS:85146303524
SN - 0377-2217
VL - 309
SP - 409
EP - 420
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 1
ER -