Working Paper: NBER ID: w22952
Authors: Christian Catalini; Joshua S. Gans
Abstract: We build on economic theory to discuss how blockchain technology can shape innovation and competition in digital platforms. We identify two key costs affected by the technology: the cost of verification and the cost of networking. The cost of verification relates to the ability to cheaply verify state, including information about past transactions and their attributes, and current ownership in a native digital asset. The cost of networking, instead, relates to the ability to bootstrap and operate a marketplace without assigning control to a centralized intermediary. This is achieved by combining the ability to cheaply verify state with economic incentives targeted at rewarding state transitions that are particularly valuable from a network perspective, such as the contribution of the resources needed to operate, scale, and secure a decentralized network. The resulting digital marketplaces allow participants to make joint investments in shared infrastructure and digital public utilities without assigning market power to a platform operator, and are characterized by increased competition, lower barriers to entry, and a lower privacy risk. Because of their decentralized nature, they also introduce new types of inefficiencies and governance challenges.
Keywords: Blockchain; Digital Platforms; Verification Costs; Networking Costs; Decentralization
JEL Codes: D4; D47; O16; O31; O32; O33; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reduction in the cost of verification (L15) | decreased reliance on intermediaries (L81) |
| decreased reliance on intermediaries (L81) | increased transaction efficiency (G14) |
| reduction in the cost of networking (D85) | establishment of decentralized networks (D85) |
| establishment of decentralized networks (D85) | increased competition and innovation in digital marketplaces (L17) |
| reduction in the cost of verification (L15) | increased transaction efficiency (G14) |
| reduction in the cost of networking (D85) | lower barriers to entry for new market participants (L17) |