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Distributed Ledgers and the Governance of Money

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  • Auer, Raphael
  • Shin, Hyun Song
  • Monnet, Cyril

Abstract

Blockchain technology breathes new life into the classical analysis of money as a substitute for a ledger of all past transactions. While it involves updating the ledger through a decentralized consensus on the unique truth, the robustness of the equilibrium that supports this consensus depends on who has access to the ledger and how it can be updated. To find the optimal solution, Buterin’s “scalability trilemma†needs to be addressed, so that a workable balance can be found between decentralization, security (i.e. a robust consensus), and scale (the efficient volume of transactions). Using a global game analysis of an exchange economy with credit, we solve for the optimal ledger design that balances the three objectives of this trilemma. We characterize the optimal number of validators, supermajority threshold, fees and transaction size. When intertemporal incentives are strong, a centralized ledger is always optimal. Otherwise, decentralization may be optimal, and validators need to be selected from the set of users of the system.

Suggested Citation

  • Auer, Raphael & Shin, Hyun Song & Monnet, Cyril, 2021. "Distributed Ledgers and the Governance of Money," CEPR Discussion Papers 16752, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16752
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    Cited by:

    1. Raphael Auer & Rainer Boehme, 2021. "Central bank digital currency: the quest for minimally invasive technology," BIS Working Papers 948, Bank for International Settlements.
    2. Raphael Auer & Codruta Boar & Giulio Cornelli & Jon Frost & Henry Holden & Andreas Wehrli, 2021. "CBDCs beyond borders: results from a survey of central banks," BIS Papers, Bank for International Settlements, number 116.
    3. Joseph Abadi & Markus Brunnermeier, 2018. "Blockchain Economics," NBER Working Papers 25407, National Bureau of Economic Research, Inc.
    4. Kee-Youn Kang, 2023. "Cryptocurrency and double spending history: transactions with zero confirmation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(2), pages 453-491, February.
    5. Bokolo Anthony Jnr., 2022. "Toward a collaborative governance model for distributed ledger technology adoption in organizations," Environment Systems and Decisions, Springer, vol. 42(2), pages 276-294, June.
    6. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    7. Sebastian Edwards, 2021. "Macroprudential Policies and The Covid-19 Pandemic: Risks and Challenges For Emerging Markets," NBER Working Papers 29441, National Bureau of Economic Research, Inc.
    8. Ferry Syarifuddin & Toni Bakhtiar, 2021. "Monetary Policy Strategy In The Presence Of Central Bank Digital Currency," Working Papers WP/09/2021, Bank Indonesia.

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    More about this item

    Keywords

    Market design; Money; Distributed ledger technology; Dlt; Blockchain; Decentralized finance; Global game; Consensus;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G2 - Financial Economics - - Financial Institutions and Services
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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