Citation

Discussion Paper Details

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Title: Blockchain Economics

Author(s): Joseph Abadi and Markus K Brunnermeier

Publication Date: December 2018

Keyword(s): Blockchain Economics, cryptocurrencies, Digital Currencies, distributed ledger technology and Fintech

Programme Area(s): Financial Economics, Industrial Organization, International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Abadi, J and Brunnermeier, M. 2018. 'Blockchain Economics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13420