Permissioned distributed ledgers and the governance of money

BIS Working Papers  |  No 924  | 
27 January 2021
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 |  64 pages



Since the late 1990s, monetary theorists have regarded money in general and cash in particular as a substitute for a publicly available and freely accessible record-keeping device. Theoretically, cash could be replaced by a public ledger recording all past and present transactions. Distributed ledger technology (DLT) is such a record-keeping device that can ensure trade without a central authority – but can it do so efficiently and more robustly than traditional, centralised exchange?


This paper examines the economic opportunities and challenges of DLT, focusing on the strategic elements underlying its optimal design and its efficiency compared with a centrally managed payment system.

In permissioned DLT, a known network of designated validators can append the distributed ledger via a majority or supermajority rule. This paper addresses the incentives validators need to sustain honest exchange. Two economic forces that differentiate permissioned DLT from conventional centralised marketplaces in terms of efficiency include (i) that it is easier to achieve good governance in decentralised settings and (ii) that the actions of multiple validators need to be coordinated via economic incentives. The latter in particular requires rents for the validators to overcome free-riding. The optimal design hence balances the greater robustness derived from a more decentralised governance structure with the increasing difficulty of coordinating a larger network of validators.


We find that under specific circumstances, DLT may have economic potential in financial markets and payments due to enhanced robustness and the potentially lower cost of achieving good governance in a decentralised network of validators compared with a central intermediary. However, such improvements do not come for free; ie market design and ensuring incentives of the validators matter. In particular, maintaining a robust monetary equilibrium requires overcoming the possibility that validators exploit their powerful positions, which requires high rents and the absence of unanimity. We theoretically examine these forces and derive the optimal number of validators, their compensation and the optimal voting rule. Our results suggest that a centralised ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralised ledger.


We explore the economics and optimal design of "permissioned" distributed ledger technology (DLT) in a credit economy. Designated validators verify transactions and update the ledger at a cost that is derived from a supermajority voting rule, thus giving rise to a public good provision game. Without giving proper incentives to validators, however, their records cannot be trusted because they cannot commit to verifying trades and they can accept bribes to incorrectly validate histories. Both frictions challenge the integrity of the ledger on which credit transactions rely. In this context, we examine the conditions under which the process of permissioned validation supports decentralized exchange as an equilibrium, and analyze the optimal design of the trade and validation mechanisms. We solve for the optimal fees, number of validators, supermajority threshold and transaction size. A stronger consensus mechanism requires higher rents be paid to validators. Our results suggest that a centralized ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralized ledger.

JEL Codes: C72, C73, D4, E42, G2, L86

Keywords: digital currencies, money, distributed ledger, blockchain, coordination game, global game, consensus, market design