Failure is (literally) an Option: Atomic Commitment vs Optionality in Decentralized Finance

Abstract

Many aspects of blockchain-based decentralized finance can be understood as an extension of classical distributed computing. In this paper, we trace the evolution of two interrelated notions: failure and fault-tolerance. In classical distributed computing, a failure to complete a multi-party protocol is typically attributed to hardware malfunctions. A fault-tolerant protocol is one that responds to such failures by rolling the system back to an earlier consistent state. In the presence of Byzantine failures, a failure may be the result of an attack, and a fault-tolerant protocol is one that ensures that attackers will be punished and victims compensated. In modern decentralized finance however, failure to complete a protocol can be considered a legitimate option, not a transgression. A fault-tolerant protocol is one that ensures that the party offering the option cannot renege, and the party purchasing the option provides fair compensation (in the form of a fee) to the offering party. We sketch the evolution of such protocols, starting with two-phase commit, and finishing with timed hashlocked smart contracts.