Trades in today’s financial system are inherently subject to settlement uncertainty. This paper explores tokenization as a potential technological solution. A token system, by enabling programmability of assets, can be designed to eradicate settlement uncertainty. We study the allocations achieved in a decentralized market with either the legacy settlement system or a token system. Tokenization can improve efficiency in markets subject to a limited commitment problem. However, it also materially alters the information environment, which in turn aggravates a hold-up problem. This limits potential gains from resolving settlement uncertainty, particularly for markets that depend on intermediaries.
@InProceedings{lee_et_al:OASIcs.Tokenomics.2021.8, author = {Lee, Michael Junho and Martin, Antoine and Townsend, Robert M.}, title = {{Optimal Design of Tokenized Markets}}, booktitle = {3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021)}, pages = {8:1--8:1}, series = {Open Access Series in Informatics (OASIcs)}, ISBN = {978-3-95977-220-4}, ISSN = {2190-6807}, year = {2022}, volume = {97}, editor = {Gramoli, Vincent and Halaburda, Hanna and Pass, Rafael}, publisher = {Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik}, address = {Dagstuhl, Germany}, URL = {https://drops.dagstuhl.de/entities/document/10.4230/OASIcs.Tokenomics.2021.8}, URN = {urn:nbn:de:0030-drops-159051}, doi = {10.4230/OASIcs.Tokenomics.2021.8}, annote = {Keywords: Tokenization, programmability, settlement uncertainty, asymmetric information} }
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