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The value of decentralization using the blockchain

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  • Reuter, Marco

Abstract

Although blockchain technology and cryptocurrencies have grown in popularity over the past years, there does not seem to be a consensus if they bring any value to economic interactions. In this paper, I argue that a fundamental value the blockchain provides is commitment. I develop a model of an entrepreneur, who can create a network for her users. She can decide to retain control of the network with centralized implementation through a regular company, or surrender control over the network with a decentralized implementation through the blockchain. Users that join the network are subject to a locked-in effect. I show that a decentralized implementation of the network is (i) preferred by the entrepreneur and (ii) a Pareto improvement, if and only if the size of the locked-in effect is sufficiently large.

Suggested Citation

  • Reuter, Marco, 2022. "The value of decentralization using the blockchain," ZEW Discussion Papers 22-056, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:22056
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    References listed on IDEAS

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    More about this item

    Keywords

    Blockchain; Smart Contracts; Decentralization; Cryptocurrency; Commitment; Networks;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D00 - Microeconomics - - General - - - General
    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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