DP13420 Blockchain Economics
Author(s): | Joseph Abadi, Markus K Brunnermeier |
Publication Date: | December 2018 |
Keyword(s): | Blockchain Economics, cryptocurrencies, Digital Currencies, distributed ledger technology, Fintech |
JEL(s): | |
Programme Areas: | Financial Economics, Industrial Organization, International Macroeconomics and Finance, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=13420 |
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.