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Blockchain Economics

This foundational paper addresses the economic principles underpinning blockchain technology, focusing on the trade-offs between decentralization, scalability,

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Abstract

This foundational paper addresses the economic principles underpinning blockchain technology, focusing on the trade-offs between decentralization, scalability, and security. The authors propose a formal economic model to explain why and when users choose to use decentralized ledgers compared to centralized databases. The paper investigates the role of tokenomics in aligning the interests of various stakeholders, including miners, validators, and users. It explores the mechanism of consensus protocols and how they essentially act as a market for computing power or stake. A significant portion of the paper is dedicated to the study of transaction fees and how they represent the opportunity cost of processing power in a decentralized environment. The authors argue that blockchain economics must be analyzed through the lens of incentive design, where protocol stability is dependent on the equilibrium between mining/staking costs and the intrinsic value provided by the network’s censorship resistance and transparency. This work is essential for anyone seeking a rigorous economic framework to evaluate Web3 protocols. Authors: Joseph Abadi, Markus Brunnermeier Publication: Academic Paper Publication date: 2018-01-01

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Key findings

  • Blockchain systems function as decentralized markets where consensus is reached through economic incentives.
  • The cost of security is tied directly to the value of the network tokens and the consensus mechanism.
  • Decentralization provides utility through censorship resistance but introduces significant efficiency costs.
  • Transaction fees represent a critical mechanism for resource allocation and spam prevention.

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Citation

Joseph Abadi, Markus Brunnermeier (2018). Blockchain Economics. Academic Paper. https://www.nber.org/papers/w25407
Canonical knowledge ID: research:blockchain-economics