Mechanism Design with Blockchain Enforcement

Abstract

We study the design of self-enforcing mechanisms that do not depend on trusted third parties (e.g., courts, trusted mechanism designers) or long-term relationships. Instead, we leverage blockchain-based smart contracts. We develop the digital court, a smart contract designed to punish agents who violate agreements, replacing one of the roles of legal enforcement. Our digital court enables the execution of general agreements while maintaining the confidentiality of agreement details, even when deployed on public blockchains. With existing smart contract platforms (e.g., Ethereum), our approach is readily available in practice. Our results demonstrate that, if misused, smart contracts could facilitate illegal agreements.