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Blockchain Disruption and Smart Contracts

49 Pages Posted: 14 Jun 2017 Last revised: 17 Oct 2017

Lin William Cong

University of Chicago - Booth School of Business

Zhiguo He

University of Chicago - Booth School of Business, and NBER

Date Written: October 6, 2017

Abstract

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

Suggested Citation

Cong, Lin William and He, Zhiguo, Blockchain Disruption and Smart Contracts (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=2985764

Lin Cong (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Zhiguo He

University of Chicago - Booth School of Business, and NBER ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

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