Footprints on a Blockchain: Trading and Information Leakage in Distributed Ledgers

Abstract

This article examines information leakage when trading in distributed ledgers. We show how the lack of time priority in the period between the publication of a transaction and its validation by miners or designated participants can expose a transaction’s footprint to the market, resulting in potential front-running and manipulation. We propose a cryptographic approach for solving information leakage problems in distributed ledgers that relies on using a hash (or fingerprint) to secure time priority, followed by a second communication that reveals more features of the underlying market transaction—in effect using a transaction’s fingerprint to hide its footprint. Solving the information leakage problem greatly expands the potential applications of private distributed ledger technology to include trading.

TOPICS: Quantitative methods, exchanges/markets/clearinghouses