Authors: Michael Junho Lee, Antoine Martin, and Robert Townsend
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Staff Reports
Optimal Design of Tokenized Markets
Number 1121
September 2024
September 2024
JEL classification: D47, D82, D86, G29
Trades in today’s financial system are inherently subject to settlement uncertainty. This paper explores tokenization as a potential technological solution. A token system, by enabling programmability of assets, can be designed to eradicate settlement uncertainty. We study the allocations achieved in a decentralized market with either the legacy settlement system or a token system. Tokenization can improve efficiency in markets subject to a limited commitment problem. However, it also materially alters the information environment, which in turn aggravates a hold-up problem. This limits potential gains from resolving settlement uncertainty, particularly for markets that depend on intermediaries. We show that optimal design hinges on joint design of settlement and trading systems, and in particular, that token systems work best when matched with direct trading.
Author Disclosure Statement(s)
Michael Junho Lee
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Antoine Martin
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Robert M. Townsend
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Antoine Martin
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Robert M. Townsend
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Lee, Michael Junho, Antoine Martin, and Robert M. Townsend. 2024. “Optimal Design of Tokenized Markets.” Federal Reserve Bank of New York Staff Reports, no. 1121, September. https://doi.org/10.59576/sr.1121
Lee, Michael Junho, Antoine Martin, and Robert M. Townsend. 2024. “Optimal Design of Tokenized Markets.” Federal Reserve Bank of New York Staff Reports, no. 1121, September. https://doi.org/10.59576/sr.1121
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