The value of decentralization using the blockchain

Reuter, Marco

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URN:	urn:nbn:de:bsz:180-madoc-637568
Document Type:	Working paper
Year of publication:	2022
The title of a journal, publication series:	ZEW Discussion Papers
Volume:	22-056
Place of publication:	Mannheim
Publication language:	English
Institution:	Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung Außerfakultäre Einrichtungen > Graduate School of Economic and Social Sciences - CDSE (Economics)
MADOC publication series:	Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject:	330 Economics
Classification:	JEL: C70 , D00 , D2 , D4 , L2,
Keywords (English):	blockchain , smart contracts , decentralization , cryptocurrency , commitment , networks
Abstract:	Although blockchain technology and cryptocurrencies have grown in popularity over the past years, there does not seem to be a consensus if they bring any value to economic interactions. In this paper, I argue that a fundamental value the blockchain provides is commitment. I develop a model of an entrepreneur, who can create a network for her users. She can decide to retain control of the network with centralized implementation through a regular company, or surrender control over the network with a decentralized implementation through the blockchain. Users that join the network are subject to a locked-in effect. I show that a decentralized implementation of the network is (i) preferred by the entrepreneur and (ii) a Pareto improvement, if and only if the size of the locked-in effect is sufficiently large