Scaling Smart Contracts via Layer-2 Technologies: Some Empirical Evidence

Lin Cong, Xiang Hui, Catherine Tucker and Luofeng Zhou

No 30912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Blockchain-based smart contracts can potentially replace certain traditional contracts through decentralized enforcement and reduced transaction costs. However, scalability is a key bottleneck hindering their broader application and adoption, often leading to concentrated or exclusive networks. To avoid falling short of the original promise of the technology, firms actively explore "layer-2" methods for scaling. We provide some initial evidence on the economic implications of a layer-2 scaling solution, which moves information aggregation from on-chain to off-chain peer-to-peer networks. A parallel-system experiment allows clean identification because we observe the same unit in the treatment and control systems at the same time. We find that this scaling solution reduces operating costs by 76%, and importantly, leads to decentralization with lower market concentration and more participation, which in turn improves data accuracy. The findings provide initial evidence of how blockchain and smart contracting technologies evolve towards achieving decentralized and scalable trust.

JEL-codes: D20 L86 O33 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-cta, nep-exp and nep-pay
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Published as Lin William Cong & Xiang Hui & Catherine Tucker & Luofeng Zhou, 2023. "Scaling Smart Contracts via Layer-2 Technologies: Some Empirical Evidence," Management Science, vol 69(12), pages 7306-7316.

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