Some Simple Economics of the Blockchain

33 Pages Posted: 19 Dec 2016

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; 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: December 2016

Abstract

We rely on economic theory to discuss how blockchain technology will shape innovation in digital platforms. We identify two key costs affected by the technology: 1) the cost of verification; and 2) the cost of networking. The first cost relates to the ability to cheaply verify the attributes of a transaction. The second one to the ability to bootstrap and operate a digital marketplace without the need for a traditional intermediary. A blockchain allows a decentralized network of economic agents to agree, at regular intervals, about the true state of shared data. This shared data can sup- port multiple types of online transactions and corresponding payments, exchanges of IP, information or other types of digital assets. The resulting digital marketplaces are characterized by increased competition, lower barriers to entry, lower privacy risk, and allow participants to make join investments in shared infrastructure without assigning market power to a platform operator. They also challenge the existing revenue models of incumbents, and open opportunities for new approaches to data ownership and licensing, digital advertising, incentivizing product adoption, auctions and reputation systems.

Suggested Citation

Catalini, Christian and Gans, Joshua S., Some Simple Economics of the Blockchain (December 2016). NBER Working Paper No. w22952. Available at SSRN: https://ssrn.com/abstract=2887234

Christian Catalini (Contact Author)

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

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

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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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