Can You Trust the Blockchain? The (Limited) Power of Peer-to-Peer Networks for Information Provision
42 Pages Posted: 5 Nov 2019 Last revised: 24 Mar 2020
Date Written: March 23, 2020
We investigate the potentials and limits of privacy-preserving blockchain technology for information provision. In our model, heterogeneous firms can adopt a privacy-preserving blockchain or rely on traditional institutions. The blockchain leverages its peer-to-peer architecture to disseminate an aggregate signal about each firm's valuation. The firm-specific information provision depends on two factors: (i) the blockchain's fit for analyzing a given firm's data, and (ii) its reach into the economy. The technology can improve information provision in two ways. The adoption decision itself may serve as a credible signal of a firm's valuation, and the blockchain may generate more information than traditional institutions when its reach is sufficiently high. However, we characterize an equilibrium in which high-value and low-value firms are present both inside and outside the blockchain, which limits both channels' ability to generate information. The overall information provision can even fall below the benchmark case in which blockchain technology is not available.
Keywords: Blockchain, Disclosure, Information provision, Peer-to-peer, Technology adoption
JEL Classification: D21, D40, M41, M48
Suggested Citation: Suggested Citation