Some Simple Economics of the Blockchain
33 Pages Posted: 19 Dec 2016
Date Written: December 2016
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.
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