Research Area:  Blockchain Technology

Abstract:

Transactions submitted through the blockchain peer-to-peer (P2P) network may leak out exploitable information. We study the economic incentives behind the adoption of blockchain dark venues, where users transactions are observable only by miners on these venues. We show that miners may not fully adopt dark venues to preserve rents extracted from arbitrageurs, hence creating execution risk for users. The dark venue neither eliminates frontrunning risk nor reduces transaction costs. It strictly increases the payoff of miners, weakly increases the payoff of users, and weakly reduces arbitrageurs profits. We provide empirical support for our main implications, and show that they are economically significant. A 1% increase in the probability of being frontrun raises users adoption rate of the dark venue by 0.6%. Arbitrageurs cost-to-revenue ratio increases by a third with a dark venue.

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Author(s) Name:  Agostino Capponi, Ruizhe Jia, Ye Wang

Publisher name:  arXiv:2202.05779

DOI:  10.48550/arXiv.2202.05779

Volume Information:  

Paper Link:   https://arxiv.org/abs/2202.05779