Working Paper: NBER ID: w30912
Authors: Lin William Cong; Xiang Hui; Catherine Tucker; Luofeng Zhou
Abstract: Blockchain-based smart contracts can potentially replace certain traditional contracts through decentralized enforcement and reduced transaction costs. However, scalability is a key bottleneck hindering their broader application and adoption, often leading to concentrated or exclusive networks. To avoid falling short of the original promise of the technology, firms actively explore "layer-2" methods for scaling. We provide some initial evidence on the economic implications of a layer-2 scaling solution, which moves information aggregation from on-chain to off-chain peer-to-peer networks. A parallel-system experiment allows clean identification because we observe the same unit in the treatment and control systems at the same time. We find that this scaling solution reduces operating costs by 76%, and importantly, leads to decentralization with lower market concentration and more participation, which in turn improves data accuracy. The findings provide initial evidence of how blockchain and smart contracting technologies evolve towards achieving decentralized and scalable trust.
Keywords: blockchain; smart contracts; layer2 scaling solutions; decentralization; data accuracy
JEL Codes: D20; L86; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| off-chain aggregation (C43) | operating costs (D23) |
| off-chain aggregation (C43) | market concentration (L11) |
| off-chain aggregation (C43) | data accuracy (Y10) |