Working Paper: CEPR ID: DP13420
Authors: Joseph Abadi; Markus K. Brunnermeier
Abstract: When is record-keeping better arranged through a blockchain than through a traditional centralized intermediary? The ideal qualities of any record-keeping system are (i) correctness, (ii) decentralization, and (iii) cost efficiency. We point out a \textit{blockchain trilemma}: no ledger can satisfy all three properties simultaneously. A centralized record-keeper extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes correct reporting. Blockchains drive down rents by allowing for free entry of record-keepers and portability of information to competing "forks.'' Blockchains must therefore provide static incentives for correctness through computationally expensive proof-of-work algorithms and permit record-keepers to roll back history in order to undo fraudulent reports. While blockchains can keep track of ownership transfers, enforcement of possession rights is often better complemented by centralized record-keeping.
Keywords: blockchain; economics; fintech; cryptocurrencies; digital currencies; distributed ledger technology
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| centralized recordkeeping (G28) | honest reporting (Y30) |
| blockchain structure (L22) | static incentives for correctness (J33) |
| type of ledger used (M41) | effectiveness of enforcement (K40) |
| rollback ability (C71) | reduced fraudulent reports (M48) |