Blockchain Economics

86 Pages Posted: 7 Jan 2019

See all articles by Joseph Abadi

Joseph Abadi

Princeton University

Markus K. Brunnermeier

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2018

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.

Keywords: Blockchain Economics, cryptocurrencies, Digital Currencies, distributed ledger technology, Fintech

Suggested Citation

Abadi, Joseph and Brunnermeier, Markus Konrad, Blockchain Economics (December 2018). CEPR Discussion Paper No. DP13420, Available at SSRN: https://ssrn.com/abstract=3310346

Joseph Abadi (Contact Author)

Princeton University

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3
Abstract Views
1,328
PlumX Metrics