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A blockchain replaces central counterparties with time-consuming consensusprotocols to record the transfer of ownership. This settlement latency slowscross-exchange trading, exposing arbitrageurs to price risk. Off-chainsettlement, instead, exposes arbitrageurs to costly default risk. We show withBitcoin network and order book data that cross-exchange price differencescoincide with periods of high settlement latency, asset flows chase arbitrageopportunities, and price differences across exchanges with low default risk aresmaller. Blockchain-based trading thus faces a dilemma: Reliable consensusprotocols require time-consuming settlement latency, leading to arbitragelimits. Circumventing such arbitrage costs is possible only by reinstallingtrusted intermediation, which mitigates default risk.

Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets