An Impossible Trinity in Blockchain-based Transactions: Decentralization, Privacy, and Lower Transaction Costs

30 Pages Posted: 6 Aug 2020 Last revised: 12 Nov 2021

See all articles by Soo Jin Kim

Soo Jin Kim

Government of Canada - Bank of Canada

Date Written: November 12, 2021

Abstract

Decentralized blockchain-based transactions benefit users through their openness, transparency, and immutability, which may come at the expense of privacy concerns. This paper shows that if there is a dilemma between decentralization and privacy protection, such that a more decentralized system increases the risks of data leakage, allowing additional privacy protection within the blockchain network at a cost, such as hiring mixers, does not resolve the initial dichotomy. However, if non-protected users benefit from positive externalities from the additional protection provided to protected users, such that all users enjoy less privacy concerns with double protection, the dilemma of decentralization and privacy risks can be resolved, despite the higher transaction costs required. Thus, double privacy protection at a cost transforms the problem with a dilemma into one with a trilemma. Given the trilemma, blockchain-based services, such as payment gateways, need to have effective privacy protections for consumers at a sufficiently low cost, which results in a less serious initial effort for stable and large-scale adoption.

Keywords: Privacy, Decentralized Platform, Blockchain

JEL Classification: L10, L17, L86

Suggested Citation

Kim, Soo Jin, An Impossible Trinity in Blockchain-based Transactions: Decentralization, Privacy, and Lower Transaction Costs (November 12, 2021). ShanghaiTech SEM Working Paper No. 2020-010, Available at SSRN: https://ssrn.com/abstract=3668057 or http://dx.doi.org/10.2139/ssrn.3668057

Soo Jin Kim (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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