Blockchain Economics

Markus Brunnermeier and Joseph Abadi

No 13420, CEPR Discussion Papers from Centre for Economic Policy Research

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 economics; Fintech; Cryptocurrencies; Digital currencies; Distributed ledger technology (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-mic and nep-pay
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Blockchain Economics (2022)
Working Paper: Blockchain Economics (2019)
Working Paper: Blockchain Economics (2018)
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