Bitcoin, Distributed Ledgers and the Theory of the Firm
36 Pages Posted: 14 Feb 2019
Date Written: January 20, 2019
The Bitcoin system implements a coordination mechanism enabling peer-to-peer transactions in adversarial environments, without using a central third party. Some scholars make exuberant claims about the significance of this mechanism, called Distributed Ledger Technology. We use Incomplete Contracting models of the Theory of the Firm to dismiss those claims and analyze the benefits and limitations of Distributed Ledgers. Introducing a two-layer model, we show that they create markets whose design layer employs traditional forms of governance and whose execution layer represents an original contract enforcement mechanism, governed as a hierarchy. Permissioned and private Distributed Ledgers only provide cryptographic assurances in addition to the functions offered by traditional distributed systems. They may be implemented by electronic organizations when trusted central operators cannot be formed. Permissionless Distributed Ledgers allow users to resist censorship and expropriation, by making some tradeoffs: lower throughput, higher coordination costs, and a transfer of risks to the users.
Keywords: Bitcoin, Contract Theory, Distributed Ledger Technology, Transaction Cost, Blockchain, Distributed Ledgers
JEL Classification: L14, D23, K11, K12, L22, L86
Suggested Citation: Suggested Citation