A market-based approach to managing the risk of peer-to-peer transactions

Market-based principles can be used to manage the risk of distributed peer-to-peer transactions. This is demonstrated by Ptrim, a system that builds a transaction default market on top of a main transaction processing system, within which peers offer to underwrite the transaction risk for a slight increase in the transaction cost. The insurance cost, determined through market-based mechanisms, is a way of identifying untrustworthy peers and perilous transactions. The risk of the transactions is contained, and at the same time members of the peer-to-peer network capitalise on their market knowledge by profiting as transaction insurers. We evaluated the approach through trials with the deployed Ptrim prototype, as well as composite experiments involving real online transaction data and real subjects participating in the transaction default market. We examine the efficacy of our approach both from a theoretical and an experimental perspective. Our findings suggest that the Ptrim market layer functions in an efficient manner, and is able to support the transaction processing system through the insurance offers it produces, thus acting as an effective means of reducing the risk of peer-to-peer transactions. In our conclusions we discuss how a system like Ptrim assimilates properties of real world markets, and its potential exposure and possible countermeasures to events such as those witnessed in the recent global financial turmoil.