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A Smart-Contract to Resolve Multiple Equilibrium in Intermediated Trade

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  • Daniel Aronoff
  • Robert M. Townsend

Abstract

We present a model of a market that is intermediated by broker-dealers where there is multiple equilibrium. We then design a smart-contract that receives messages and algorithmically sends trading instructions. The smart-contract resolves the multiple equilibrium by implementing broker-dealer joint profit maximization as a Nash equilibrium. This outcome relies upon several factors: Agent commitments to follow the smart contract protocol; selective privacy of information; a structured timing of trade offers and acceptances and, crucially, trust that the smart-contract will execute the correct algorithm. Commitment is achieved by a legal contract or contingent deposit that incentivizes agents to comply with the protocol. Privacy is maintained by using fully homomorphic encryption. Multiple equilibrium is resolved by imposing a sequential ordering of trade offers and acceptances, and trust in the smart-contract is achieved by appending the smart-contract to a public blockchain, thereby enabling verification of its computations. This model serves as an example of how a smart-contract implemented with cryptography and blockchain can improve market outcomes.

Suggested Citation

  • Daniel Aronoff & Robert M. Townsend, 2025. "A Smart-Contract to Resolve Multiple Equilibrium in Intermediated Trade," Papers 2505.22940, arXiv.org.
    • Handle: RePEc:arx:papers:2505.22940
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    File URL: http://arxiv.org/pdf/2505.22940
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