Economic Implications of Blockchain Platforms
This addresses economic inefficiencies in markets with asymmetric information, but it is incremental as it builds on existing blockchain and information asymmetry theories.
The paper examines how blockchain platforms, through smart contracts, reshape market segmentation and agent differentiation, leading to price and quality spreads compared to traditional platforms, and finds that smart contract innovation has non-monotonic effects on trading value, cryptocurrency price, and consumer welfare, with managers sometimes under-investing in innovation, causing welfare losses.
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.