Discussion paper

DP13420 Blockchain Economics

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.

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Citation

Abadi, J and M Brunnermeier (2018), ‘DP13420 Blockchain Economics‘, CEPR Discussion Paper No. 13420. CEPR Press, Paris & London. https://cepr.org/publications/dp13420