Some Simple Economics of the Blockchain

39 Pages Posted: 27 Nov 2016 Last revised: 11 Jun 2019

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Calibra, Inc.; National Bureau of Economic Research (NBER)

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2019

Abstract

We build on economic theory to discuss how blockchain technology can shape innovation and competition in digital platforms. We identify two key costs affected by the technology: the cost of verification and the cost of networking. The cost of verification relates to the ability to cheaply verify state, including information about past transactions and their attributes, and current ownership in a native digital asset. The cost of networking, instead, relates to the ability to bootstrap and operate a marketplace without assigning control to a centralized intermediary. This is achieved by combining the ability to cheaply verify state with economic incentives targeted at rewarding state transitions that are particularly valuable from a network perspective, such as the contribution of the resources needed to operate, scale, and secure a decentralized network. The resulting digital marketplaces allow participants to make joint investments in shared infrastructure and digital public utilities without assigning market power to a platform operator, and are characterized by increased competition, lower barriers to entry, and a lower privacy risk. Because of their decentralized nature, they also introduce new types of inefficiencies and governance challenges.

Keywords: blockchain, digital platforms, advertising, early adopters, market design, tokens, initial coin offerings, smart contracts, distributed ledgers

Suggested Citation

Catalini, Christian and Gans, Joshua S., Some Simple Economics of the Blockchain (April 20, 2019). Rotman School of Management Working Paper No. 2874598; MIT Sloan Research Paper No. 5191-16. Available at SSRN: https://ssrn.com/abstract=2874598 or http://dx.doi.org/10.2139/ssrn.2874598

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Calibra, Inc.

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National Bureau of Economic Research (NBER) ( email )

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Joshua S. Gans

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

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Cambridge, MA 02138
United States

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