Some Simple Economics of the Blockchain

31 Pages Posted: 27 Nov 2016 Last revised: 14 Apr 2017

Christian Catalini

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

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2016

Abstract

We rely on economic theory to discuss how blockchain technology and cryptocurrencies will influence the rate and direction of innovation. We identify two key costs that are affected by distributed ledger technology: 1) the cost of verification; and 2) the cost of networking. Markets facilitate the voluntary exchange of goods and services between buyers and sellers. For an exchange to be executed, key attributes of a transaction need to be verified by the parties involved at multiple points in time. Blockchain technology, by allowing market participants to perform costless verification, lowers the costs of auditing transaction information, and allows new marketplaces to emerge. Furthermore, when a distributed ledger is combined with a native cryptographic token (as in Bitcoin), marketplaces can be bootstrapped without the need of traditional trusted intermediaries, lowering the cost of networking. This challenges existing revenue models and incumbents's market power, and opens opportunities for novel approaches to regulation, auctions and the provision of public goods, software, identity and reputation systems.

Keywords: blockchain, cryptocurrency, Bitcoin, distributed ledger technology, market design

Suggested Citation

Catalini, Christian and Gans, Joshua S., Some Simple Economics of the Blockchain (November 23, 2016). 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 )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty-and-research/faculty-directory/detail/?id=58777

Joshua S. Gans

University of Toronto - Rotman School of Management ( email )

Canada

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

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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