Title

Blockchain Economics

Author(s)

Joseph Abadi Joseph Abadi (Federal Reserve Bank of Philadelphia)

Markus Brunnermeier Markus Brunnermeier (Princeton University)

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.

Creation Date

2019-08

Section URL ID

Paper Number

2019-12

URL

https://scholar.princeton.edu/sites/default/files/markus/files/blockchain_paper_v7a.pdf

File Function

Jel

D82, E42, G29

Keyword(s)

Blockchain; Currency; Discipline; Costs; Economics; Competition; Fraud; Deeds; Incentives

Suppress

false

Series

13