Distributed ledger technologies replace trusted clearing counterparties and security depositories with time-consuming consensus protocols to record the transfer of ownership. This settlement latency exposes cross-market  arbitrageurs to price risk. We theoretically derive arbitrage bounds that increase with expected latency, latency uncertainty, volatility and risk aversion . Using Bitcoin orderbook and network data, we estimate  arbitrage bounds of on average 121 basis points, explaining 91\% of the observed cross-market price differences . Consistent with our theory, periods of high latency-implied price risk exhibit large price differences, while asset flows chase arbitrage opportunities.  Blockchain-based settlement  thus introduces a non-trivial friction that impedes arbitrage activity.
Distributed ledger technologies replace central counterparties with time-consuming consensus protocols to record the transfer of ownership. This settlement latency slows down cross-market trading and exposes arbitrageurs to price risk. We theoretically derive arbitrage bounds induced by settlement latency . Using Bitcoin orderbook and network data, we estimate average arbitrage bounds of 121 basis points, explaining 91\% of the cross-market price differences , and demonstrate that asset flows chase arbitrage opportunities. Controlling for inventory holdings as a measure of trust in exchanges does not affect our main results. Blockchain-based settlement without trusted intermediation thus introduces a non-trivial friction that impedes arbitrage activity.
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trusted clearing counterparties and security depositories
central counterparties
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exposes
slows down
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trading and exposes
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that increase with expected latency, latency uncertainty, volatility and risk aversion
induced by settlement latency
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average
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on average
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observed
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. Consistent with our theory, periods of high latency-implied price risk exhibit large price differences, while
, and demonstrate that
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Controlling for inventory holdings as a measure of trust in exchanges does not affect our main results.
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without trusted intermediation