The Value of Decentralization Using the Blockchain

ZEW Discussion Paper
ZEW Discussion Paper

The Value of Decentralization Using the Blockchain

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.

Reuter, Marco (2022), The Value of Decentralization Using the Blockchain, ZEW Discussion Paper No. 22-056, Mannheim.

Authors Marco Reuter