Simple Economics of the Blockchain

Considerable and interesting piece, well worth reading if you are considering blockchain use. And a proposition of the Blockchain's value.    Not very technical.

Some Simple Economics of the Blockchain
By Christian Catalini, Joshua S. Gans
Communications of the ACM, July 2020, Vol. 63 No. 7, Pages 80-90  10.1145/3359552

In October 2008, a few weeks after the Emergency Economic Stabilization Act rescued the U.S. financial system from collapse, Satoshi Nakamoto34 introduced a cryptography mailing list to Bitcoin, a peer-to-peer electronic cash system "based on crypto graphic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party." With Bitcoin, for the first time, value could be reliably transferred between two distant, untrusting parties without the need of an intermediary. Through a clever combination of cryptography and game theory, the Bitcoin 'blockchain'—a distributed, public transaction ledger—could be used by any participant in the network to cheaply verify and settle transactions in the cryptocurrency. Thanks to rules designed to incentivize the propagation of new legitimate transactions, to reconcile conflicting information, and to ultimately agree at regular intervals about the true state of a shared ledger (a blockchain)a in an environment where not all participating agents can be trusted, Bitcoin was also the first platform, at scale, to rely on decentralized, Internet-level 'consensus' for its operations. Without involving a central clearinghouse or market maker, the platform was able to settle the transfer of property rights in the underlying digital token (bitcoin) by simply combining a shared ledger with an incentive system designed to securely maintain it.

From an economics perspective, this new market design solution provides some of the advantages of a centralized digital platform (for example, the ability of participants to rely on a shared network and benefit from network effects) without some of the consequences the presence of an intermediary may introduce such as increased market power, ability to renege on commitments to ecosystem participants, control over participants' data, and presence of a single point of failure. As a result, relative to existing financial networks, a cryptocurrency such as Bitcoin may be able to offer lower barriers to entry for new service providers and application developers, and an alternative monetary policy for individuals that do not live in countries with trustworthy institutions. Key commitments encoded in the Bitcoin protocol are its fixed supply, predetermined release schedule, and the fact that rules can only be changed with support from a majority of participants. While the resulting ecosystem may not offer an improvement for individuals living in countries with reliable and independent central banks, it may represent an option in countries that are unable to maintain their monetary policy commitments. Of course, the open and "permissionless" nature of the Bitcoin network, and the inability to adjust its supply also introduce new challenges, as the network can be used for illegal activity, and the value of the cryptocurrency can fluctuate wildly with changes in expectations about its future success, limiting its use as an effective medium of exchange.

In the article, we rely on economic theory to explain how two key costs affected by blockchain technology—the cost of verification of state, and the cost of networking—change the types of transactions that can be supported in the economy. These costs have implications for the design and efficiency of digital platforms, and open opportunities for new approaches to data ownership, privacy, and licensing; monetization of digital content; auctions and reputation systems.   ..."