Blockchain Economics

Joseph Abadi and Markus Brunnermeier
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Joseph Abadi: Federal Reserve Bank of Philadelphia

Working Papers from Princeton University. Economics Department.

Abstract: When is record-keeping better arranged through a blockchain than through a traditional centralized intermediary? The ideal qualities of any record-keeping system are (i) correctness, (ii) decentralization, and (iii) cost efficiency. We point out a textit{blockchain trilemma}: no ledger can satisfy all three properties simultaneously. A centralized record-keeper extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes correct reporting. Blockchains drive down rents by allowing for free entry of record-keepers and portability of information to competing "forks." Blockchains must therefore provide static incentives for correctness through computationally expensive proof-of-work algorithms and permit record-keepers to roll back history in order to undo fraudulent reports. While blockchains can keep track of ownership transfers, enforcement of possession rights is often better complemented by centralized record-keeping.

Keywords: Blockchain; Currency; Discipline; Costs; Economics; Competition; Fraud; Deeds; Incentives (search for similar items in EconPapers)
JEL-codes: D82 E42 G29 (search for similar items in EconPapers)
Date: 2019-08
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Related works:
Working Paper: Blockchain Economics (2022)
Working Paper: Blockchain Economics (2018)
Working Paper: Blockchain Economics (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2019-12

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