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Some Simple Economics of the Blockchain

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  • Christian Catalini
  • Joshua S. Gans

Abstract

We build on economic theory to discuss how blockchain technology can shape innovation and competition in digital platforms. We identify two key costs affected by the technology: the cost of verification and the cost of networking. The cost of verification relates to the ability to cheaply verify state, including information about past transactions and their attributes, and current ownership in a native digital asset. The cost of networking, instead, relates to the ability to bootstrap and operate a marketplace without assigning control to a centralized intermediary. This is achieved by combining the ability to cheaply verify state with economic incentives targeted at rewarding state transitions that are particularly valuable from a network perspective, such as the contribution of the resources needed to operate, scale, and secure a decentralized network. The resulting digital marketplaces allow participants to make joint investments in shared infrastructure and digital public utilities without assigning market power to a platform operator, and are characterized by increased competition, lower barriers to entry, and a lower privacy risk. Because of their decentralized nature, they also introduce new types of inefficiencies and governance challenges.

Suggested Citation

  • Christian Catalini & Joshua S. Gans, 2016. "Some Simple Economics of the Blockchain," NBER Working Papers 22952, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22952
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    Cited by:

    1. Huberman, Gur & Leshno, Jacob & Moalleni, Ciamac, 2017. "Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin Payment System," CEPR Discussion Papers 12322, C.E.P.R. Discussion Papers.
    2. Hughes, Alex & Park, Andrew & Kietzmann, Jan & Archer-Brown, Chris, 2019. "Beyond Bitcoin: What blockchain and distributed ledger technologies mean for firms," Business Horizons, Elsevier, vol. 62(3), pages 273-281.
    3. Bhambhwani, Siddharth & Delikouras, Stefanos & Korniotis, George, 2019. "Do Fundamentals Drive Cryptocurrency Prices?," CEPR Discussion Papers 13724, C.E.P.R. Discussion Papers.
    4. Benito Arruñada & Luis Garicano, 2018. "Blockchain: The birth of decentralized governance," Economics Working Papers 1608, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
    6. Christophe Schinckus & Canh Phuc Nguyen & Felicia Chong Hui Ling, 2020. "Crypto-currencies Trading and Energy Consumption," International Journal of Energy Economics and Policy, Econjournals, vol. 10(3), pages 355-364.
    7. Allen, Darcy W.E. & Berg, Chris & Markey-Towler, Brendan & Novak, Mikayla & Potts, Jason, 2020. "Blockchain and the evolution of institutional technologies: Implications for innovation policy," Research Policy, Elsevier, vol. 49(1).
    8. Genadijs GROMOVS & Mika LAMMI, 2017. "Blockchain And Internet Of Things Require Innovative Approach To Logistics Education," Transport Problems, Silesian University of Technology, vol. 12(SE), pages 23-34, December.
    9. Laurent Bach & Remy Guichardaz & Eric Schenk, 2020. "Technologie Blockchain et intermédiation dans l'industrie musicale," Working Papers of BETA 2020-16, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    10. Hosain, Md Sajjad, 2018. "Bitcoin: Future transaction currency?," MPRA Paper 87588, University Library of Munich, Germany.
    11. Canidio, Andrea, 2018. "Financial incentives for open source development: the case of Blockchain," MPRA Paper 85352, University Library of Munich, Germany.
    12. Olivier Desplebin & Gulliver Lux, 2018. "The evolution of accounting, control, audit and their practices through the prism of the Blockchain: a prospective reflection [L'évolution de la comptabilité, du contrôle, de l'audit et de leurs mé," Post-Print hal-01907902, HAL.
    13. Thakor, Anjan V., 2020. "Fintech and banking: What do we know?," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    14. Borri, Nicola, 2019. "Conditional tail-risk in cryptocurrency markets," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 1-19.
    15. Notheisen, Benedikt & Weinhardt, Christof, 2019. "The blockchain, plums, and lemons: Information asymmetries & transparency in decentralized markets," Working Paper Series in Economics 130, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    16. Shorish, Jamsheed, 2018. "Blockchain State Machine Representation," SocArXiv eusxg, Center for Open Science.
    17. Lin William Cong & Zhiguo He, 2018. "Blockchain Disruption and Smart Contracts," NBER Working Papers 24399, National Bureau of Economic Research, Inc.
    18. Darcy W E Allen & Alastair Berg & Chris Berg & Brendan Markey-Towler & Jason Potts, 2019. "Some economic consequences of the GDPR," Economics Bulletin, AccessEcon, vol. 39(2), pages 785-797.
    19. Ahluwalia, Saurabh & Mahto, Raj V. & Guerrero, Maribel, 2020. "Blockchain technology and startup financing: A transaction cost economics perspective," Technological Forecasting and Social Change, Elsevier, vol. 151(C).

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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