Blockchain Disruption and Smart Contracts
49 Pages Posted: 14 Jun 2017 Last revised: 17 Oct 2017
Date Written: October 6, 2017
Distributed ledger technology embodied in blockchains features decentralized consensus as well as low-cost, tamper-proof, and algorithmic executions, and consequently enlarges the contracting space through smart contracts. Meanwhile, the process of generating decentralized consensus, which involves information distribution, necessarily alters the informational environment. We analyze how decentralization improves consensus effectiveness, and how the quintessential features of blockchain reshape industrial organization and the landscape of competition. Smart contracts can mitigate information asymmetry and deliver higher social welfare and consumer surplus through enhanced entry and competition, yet blockchains may also encourage collusion due to the irreducible distribution of information. In general, blockchains can sustain market equilibria with a larger range of economic outcomes. We further discuss anti-trust policy implications targeted to blockchain applications, such as separating consensus record-keepers from users.
Keywords: Competition, Distributed Ledger, FinTech, Anti-trust, Incomplete Contracts, Collusion, Information, Security Design, Enforcement
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