Proof-of-work blockchains and settlement finality: A functional interpretation

Ruth Wandhofer*, Ron Berndsen

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In this paper, we aim to provide an interpretation of the legal issue of settlement finality in the context of proof-of-work distributed ledger technology, such as the Bitcoin network. Bitcoin intends to achieve certainty of settlement of its cryptocurrency in a trustless environment, without the need for intermediaries and without recourse to any legal provision. We extend earlier work on functional modeling of the theoretical settlement problem to include blockchains, and we provide a functional interpretation of settlement finality by introducing the notion of degree of settlement finality. In principle, we conclude that functional settlement finality in Bitcoin is preferred to legal enforceability. However, in practice, the Bitcoin blockchain is not suitable for the trusted environment of the regulated financial industry unless well-known issues - such as high energy consumption, low settlement speed, problems with scalability and the 51% attack risk - are resolved.

Original languageEnglish
Pages (from-to)71-104
JournalThe Journal of Financial Market Infrastructures
Volume7
Issue number4
DOIs
Publication statusPublished - Jun 2019

Keywords

  • Bitcoin
  • settlement finality
  • financial market infrastructures
  • proof-of-work algorithm
  • GROSS SETTLEMENT

Cite this

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title = "Proof-of-work blockchains and settlement finality: A functional interpretation",
abstract = "In this paper, we aim to provide an interpretation of the legal issue of settlement finality in the context of proof-of-work distributed ledger technology, such as the Bitcoin network. Bitcoin intends to achieve certainty of settlement of its cryptocurrency in a trustless environment, without the need for intermediaries and without recourse to any legal provision. We extend earlier work on functional modeling of the theoretical settlement problem to include blockchains, and we provide a functional interpretation of settlement finality by introducing the notion of degree of settlement finality. In principle, we conclude that functional settlement finality in Bitcoin is preferred to legal enforceability. However, in practice, the Bitcoin blockchain is not suitable for the trusted environment of the regulated financial industry unless well-known issues - such as high energy consumption, low settlement speed, problems with scalability and the 51{\%} attack risk - are resolved.",
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Proof-of-work blockchains and settlement finality : A functional interpretation. / Wandhofer, Ruth; Berndsen, Ron.

In: The Journal of Financial Market Infrastructures, Vol. 7, No. 4, 06.2019, p. 71-104.

Research output: Contribution to journalArticleScientificpeer-review

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