Some Simple Economics of the Blockchain

Christian Catalini and Joshua Gans

No 22952, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We build on economic theory to discuss how blockchain technology can shape innovation and competition in digital platforms. We identify two key costs affected by the technology: the cost of verification and the cost of networking. The cost of verification relates to the ability to cheaply verify state, including information about past transactions and their attributes, and current ownership in a native digital asset. The cost of networking, instead, relates to the ability to bootstrap and operate a marketplace without assigning control to a centralized intermediary. This is achieved by combining the ability to cheaply verify state with economic incentives targeted at rewarding state transitions that are particularly valuable from a network perspective, such as the contribution of the resources needed to operate, scale, and secure a decentralized network. The resulting digital marketplaces allow participants to make joint investments in shared infrastructure and digital public utilities without assigning market power to a platform operator, and are characterized by increased competition, lower barriers to entry, and a lower privacy risk. Because of their decentralized nature, they also introduce new types of inefficiencies and governance challenges.

JEL-codes: D4 D47 O16 O3 O31 O32 O33 O34 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ino, nep-mic and nep-pay
Note: IO PR
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Citations: View citations in EconPapers (81)

Published as Christian Catalini & Joshua S. Gans, 2020. "Some simple economics of the blockchain," Communications of the ACM, vol 63(7), pages 80-90.

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