Distributed Ledgers and the Governance of Money

Raphael Auer, Hyun Song Shin and Cyril Monnet

No 16752, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Blockchain technology breathes new life into the classical analysis of money as a substitute for a ledger of all past transactions. While it involves updating the ledger through a decentralized consensus on the unique truth, the robustness of the equilibrium that supports this consensus depends on who has access to the ledger and how it can be updated. To find the optimal solution, Buterin’s “scalability trilemma†needs to be addressed, so that a workable balance can be found between decentralization, security (i.e. a robust consensus), and scale (the efficient volume of transactions). Using a global game analysis of an exchange economy with credit, we solve for the optimal ledger design that balances the three objectives of this trilemma. We characterize the optimal number of validators, supermajority threshold, fees and transaction size. When intertemporal incentives are strong, a centralized ledger is always optimal. Otherwise, decentralization may be optimal, and validators need to be selected from the set of users of the system.

Keywords: Market design; Money; Distributed ledger technology; Dlt; Blockchain; Decentralized finance; Global game; Consensus (search for similar items in EconPapers)
JEL-codes: C72 C73 D4 E42 G2 L86 (search for similar items in EconPapers)
Date: 2021-11
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Related works:
Journal Article: Distributed ledgers and the governance of money (2025)
Working Paper: Distributed ledgers and the governance of money (2021)
Working Paper: Distributed Ledgers and the Governance of Money (2021)
Working Paper: Distributed Ledgers and the Governance of Money (2021)
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