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The Value of Decentralization Using the Blockchain

Author

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  • Marco Reuter

Abstract

The popularity of blockchain technology and cryptocurrencies has grown in recent years, but there is still disagreement about their value in economic interactions. In this paper, I examine the value of a blockchain for an entrepreneur who creates a network. The entrepreneur can decide to retain control of the network with a centralized implementation through a regular company, or surrender control over the network with a decentralized implementation through the blockchain. The network’s users experience a locked-in effect. I show that a decentralized implementation of the network is both (i) preferred by the entrepreneur and (ii) a Pareto improvement, if and only if the size of the locked-in effect is sufficiently large.

Suggested Citation

  • Marco Reuter, 2023. "The Value of Decentralization Using the Blockchain," CRC TR 224 Discussion Paper Series crctr224_2023_394, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2023_394
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp394
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    More about this item

    Keywords

    Blockchain; Smart Contracts; Decentralization; Cryptocurrency; Commitment; Networks;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D00 - Microeconomics - - General - - - General
    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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