The Value of Decentralization Using the Blockchain

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