The Value of Decentralization Using the Blockchain
47 Pages Posted: 15 Oct 2022 Last revised: 3 Feb 2023
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The Value of Decentralization Using the Blockchain
The Value of Decentralization Using the Blockchain
Date Written: September 15, 2022
Abstract
The popularity of blockchain technology and cryptocurrencies has grown in recent years, but there is still disagreement about their value in economic interactions. In this paper, I examine the value of a blockchain for an entrepreneur who creates a network. The entrepreneur can decide to retain control of the network with a centralized implementation through a regular company, or surrender control over the network with a decentralized implementation through the blockchain. The network’s users experience a locked-in effect. I show that a decentralized implementation of the network is both (i) preferred by the entrepreneur and (ii) a Pareto improvement, if and only if the size of the locked-in effect is sufficiently large.
Keywords: blockchain, smart contracts, decentralization, cryptocurrency, commitment, networks
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