Working Paper: NBER ID: w24399
Authors: Lin William Cong; Zhiguo He
Abstract: Blockchain technology provides decentralized consensus and potentially enlarges the contracting space using smart contracts with tamper-proofness and algorithmic executions. Meanwhile, generating decentralized consensus entails distributing information which necessarily alters the informational environment. We analyze how decentralization affects consensus effectiveness, and how the quintessential features of blockchain reshape industrial organization and the landscape of competition. Smart contracts can mitigate informational asymmetry and improve welfare and consumer surplus through enhanced entry and competition, yet the irreducible distribution of information during consensus generation may encourage greater collusion. In general, blockchains can sustain market equilibria with a wider range of economic outcomes. We further discuss anti-trust policy implications targeted to blockchain applications, such as separating consensus record-keepers from users.
Keywords: Blockchain; Smart Contracts; Decentralized Consensus; Industrial Organization; Competition
JEL Codes: D4; D8; G2; L13; L4; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Smart contracts (D86) | Mitigate informational asymmetry (D82) |
| Mitigate informational asymmetry (D82) | Improve welfare (D69) |
| Improve welfare (D69) | Enhance entry and competition (L13) |
| Decentralized consensus (D70) | Facilitate entry by new sellers (D26) |
| Decentralized consensus (D70) | Greater collusion among sellers (D43) |
| Information distribution (D39) | Alter economic behaviors (E70) |