The Value of Decentralization Using the Blockchain

I study an entrepreneur’s incentives to build a network using a blockchain. The entrepreneur can either build the network using a regular company and retain control of the network, or build the network using a blockchain and surrender control of the network. The network’s users experience a locked-in effect. I show that a decentralized implementation of the network is both (i) more profitable for the entrepreneur and (ii) a Pareto improvement, if and only if the size of the locked-in effect exceeds some threshold. Further, progressive decentralization through airdrops can be optimal.

Reuter, Marco (2022), The Value of Decentralization Using the Blockchain, ZEW Discussion Paper No. 22-056, Mannheim.