Optimal Design of Tokenized Markets

B is the only trader who is matched with 14 both the lender A and the borrower C.14 For C to acquire ownership of the asset in t = 2, B must successfully negotiate two sides of the intermediation chain. [...] As shown in the figure, B faces a settlement decision at t = 1 of whether to execute according to the 15In a settlement system like Fedwire securities, the seller of a security can fail by choosing not to send the security to the buyer, since all settlements are initiated by the seller. [...] In the fair price (Equation 14), the first two terms on the right hand side represent the expected opportunity cost for A to lend the asset to B, given that B will lend the asset to C. [...] In the context of the model, C’s payoff from retaining the asset at t = 3 is sometimes too large for the cost ∆ to provide sufficient incentives to return the asset to B. [...] In the token system, a contract is feasible only if the seller of the asset already holds the ownership rights of the asset for the date at which the asset must settle.