Economic Implications of Blockchain Platforms

TL;DR

This paper analyzes how smart contracts on blockchain platforms influence market segmentation, asset pricing, and consumer welfare, highlighting the complex effects of innovation levels and managerial incentives in asymmetric information environments.

Contribution

It introduces a model showing the non-monotonic impact of smart contract sophistication on market outcomes and explores managerial incentives affecting welfare.

Findings

Smart contract innovation has non-monotonic effects on trading value and welfare.

Market segmentation and asset spreads are influenced by blockchain platform features.

Managerial incentives can lead to welfare losses when innovation levels are suboptimal.

Abstract

In an economy with asymmetric information, the smart contract in the blockchain protocol mitigates uncertainty. Since, as a new trading platform, the blockchain triggers segmentation of market and differentiation of agents in both the sell and buy sides of the market, it recomposes the asymmetric information and generates spreads in asset price and quality between itself and a traditional platform. We show that marginal innovation and sophistication of the smart contract have non-monotonic effects on the trading value in the blockchain platform, its fundamental value, the price of cryptocurrency, and consumers' welfare. Moreover, a blockchain manager who controls the level of the innovation of the smart contract has an incentive to keep it lower than the first best when the underlying information asymmetry is not severe, leading to welfare loss for consumers.