Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets
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.
Cite
@article{arxiv.1812.00595,
title = {Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets},
author = {Nikolaus Hautsch and Christoph Scheuch and Stefan Voigt},
journal= {arXiv preprint arXiv:1812.00595},
year = {2023}
}
Comments
This paper replaces an earlier draft titled "Limits to Arbitrage in Markets with Stochastic Settlement Latency". 49 pages, 2 figures, 7 tables