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Tokenomics and blockchain fragmentation

Author

Listed:
  • Hyun Song Shin

Abstract

Money is a coordination device underpinned by strong network effects: the more others accept a form of money, the more I wish to adopt it too. The decentralisation agenda of public permissionless blockchains undercuts these network effects and leads to fragmentation of the monetary landscape. Validators who maintain the blockchain need to be rewarded to play their role with the necessary reward increasing in the degree of dependence on other validators' actions to sustain consensus. Since these rewards must ultimately be borne by users through congestion rents, capacity constraints are a feature, not a bug, especially for blockchains with more stringent standards for consensus. New blockchains with less stringent thresholds for consensus enter the market to serve users priced out of incumbent chains. The resulting fragmentation undercuts the very network effects that give money its social value. Stablecoins inherit this fragmentation from the blockchains on which they reside. The analysis has broader implications for the future of the monetary system.

Suggested Citation

  • Hyun Song Shin, 2026. "Tokenomics and blockchain fragmentation," BIS Working Papers 1335, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1335
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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