Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fifty Shades of Blockchain
“The Trust Machine”, “Distributed Trust Network”,“Bitcoin”, “Ethereum”, “Distributed Ledger”...
Smart Contracts
Slide 1/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fifty Shades of Blockchain
“The Trust Machine”, “Distributed Trust Network”,“Bitcoin”, “Ethereum”, “Distributed Ledger”...
Smart Contracts
Slide 1/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Research Questions
• Unifying features and sharper definitions of blockchainand smart contracts.
• Economic impact of blockchain, especially oncompetition.
Slide 2/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Research Questions
• Unifying features and sharper definitions of blockchainand smart contracts.
• Economic impact of blockchain, especially oncompetition.
Slide 2/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
What is Blockchain?
• Bitcoin – the original blockchain
• Double-spending, public distributed ledger• Blockchain not defined by Bitcoin.
• A database system in which parties unknown to eachother can jointly maintain and edit in a decentralizedmanner, with no individual party exercising centralcontrol.
• Cheaply maintain a robust consensus.
• Decentralized: no need to trust or rely on a centralizedauthority.
• A community to maintain consensus.
Slide 3/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
What is Blockchain?
• Bitcoin – the original blockchain
• Double-spending, public distributed ledger• Blockchain not defined by Bitcoin.
• A database system in which parties unknown to eachother can jointly maintain and edit in a decentralizedmanner, with no individual party exercising centralcontrol.
• Cheaply maintain a robust consensus.
• Decentralized: no need to trust or rely on a centralizedauthority.
• A community to maintain consensus.
Slide 3/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
What is Blockchain?
• Bitcoin – the original blockchain
• Double-spending, public distributed ledger• Blockchain not defined by Bitcoin.
• A database system in which parties unknown to eachother can jointly maintain and edit in a decentralizedmanner, with no individual party exercising centralcontrol.
• Cheaply maintain a robust consensus.
• Decentralized: no need to trust or rely on a centralizedauthority.
• A community to maintain consensus.
Slide 3/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
What is Blockchain?
• Bitcoin – the original blockchain
• Double-spending, public distributed ledger• Blockchain not defined by Bitcoin.
• A database system in which parties unknown to eachother can jointly maintain and edit in a decentralizedmanner, with no individual party exercising centralcontrol.
• Cheaply maintain a robust consensus.
• Decentralized: no need to trust or rely on a centralizedauthority.
• A community to maintain consensus.
Slide 3/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Two Important Questions
1 How to create decentralized consensus?
• Compensation for miners: Kiayias et al (2016),Baldimtsi et al (2017)
• Mining as a game: Eyal and Sirer (2014), Nayak et al(2016), Biais et al (2017).
• Proof-of-work, proof-of-stake, proof-of-burn, ....
• Achieving decentralized consensus requires distributionof information.
2 What are the economic implications of decentralizedconsensus?
• Greater contractibility: rise of smart contracts• Greater public information: information economics,
repeated games with monitoring....
Slide 4/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Two Important Questions
1 How to create decentralized consensus?
• Compensation for miners: Kiayias et al (2016),Baldimtsi et al (2017)
• Mining as a game: Eyal and Sirer (2014), Nayak et al(2016), Biais et al (2017).
• Proof-of-work, proof-of-stake, proof-of-burn, ....
• Achieving decentralized consensus requires distributionof information.
2 What are the economic implications of decentralizedconsensus?
• Greater contractibility: rise of smart contracts• Greater public information: information economics,
repeated games with monitoring....
Slide 4/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Two Important Questions
1 How to create decentralized consensus?
• Compensation for miners: Kiayias et al (2016),Baldimtsi et al (2017)
• Mining as a game: Eyal and Sirer (2014), Nayak et al(2016), Biais et al (2017).
• Proof-of-work, proof-of-stake, proof-of-burn, ....
• Achieving decentralized consensus requires distributionof information.
2 What are the economic implications of decentralizedconsensus?
• Greater contractibility: rise of smart contracts• Greater public information: information economics,
repeated games with monitoring....
Slide 4/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
What is Smart Contract?
• Smart contracts are digital contracts allowing termscontingent on decentralized consensus and areself-enforcing and tamper-proof through automatedexecution.
• What smart contract is NOT?
• Merely digital contracts.
• Centralized authority or consensus.
• Primarily human-intermediated execution
• Truly smart (AI).
• Complete contract.
Slide 5/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fundamental Tension and Applications
• Information in Decentralized Consensus
• Micro: privacy; Macro: more public information.
• Verification; Zero-knowledge Proof.
• No news is news; encrypted data are information.
• Applications
• Payments: Lightning, Ripple, Phi, etc.
• Trade Finance: R3 CEV, IBM, Wave, DTC.
• Trading and exchanges: Nasdaq Linq, Symbiont,NYIAX, etc.
Slide 6/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fundamental Tension and Applications
• Information in Decentralized Consensus
• Micro: privacy; Macro: more public information.
• Verification; Zero-knowledge Proof.
• No news is news; encrypted data are information.
• Applications
• Payments: Lightning, Ripple, Phi, etc.
• Trade Finance: R3 CEV, IBM, Wave, DTC.
• Trading and exchanges: Nasdaq Linq, Symbiont,NYIAX, etc.
Slide 6/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fundamental Tension and Applications
• Information in Decentralized Consensus
• Micro: privacy; Macro: more public information.
• Verification; Zero-knowledge Proof.
• No news is news; encrypted data are information.
• Applications
• Payments: Lightning, Ripple, Phi, etc.
• Trade Finance: R3 CEV, IBM, Wave, DTC.
• Trading and exchanges: Nasdaq Linq, Symbiont,NYIAX, etc.
Slide 6/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Fundamental Tension and Applications
• Information in Decentralized Consensus
• Micro: privacy; Macro: more public information.
• Verification; Zero-knowledge Proof.
• No news is news; encrypted data are information.
• Applications
• Payments: Lightning, Ripple, Phi, etc.
• Trade Finance: R3 CEV, IBM, Wave, DTC.
• Trading and exchanges: Nasdaq Linq, Symbiont,NYIAX, etc.
Slide 6/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Setup
• Risk-neutral, discrete time t = 1, 2, · · · .
• Buyers: unit measure, short-lived;Aggregate shock: probability λ showing up (indicated byIt).
• Three long-lived sellers: incumbents (A&B) authentic;entrant (C) authentic with prob π.Only authentic sellers deliver.
• Quality of service q = (qA, qB , qC ) i.i.d. and public,[q, q].Interpreted as probability of success, upon which buyersget unit utility.
• Service production cost k.
Slide 7/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Setup
• Risk-neutral, discrete time t = 1, 2, · · · .
• Buyers: unit measure, short-lived;Aggregate shock: probability λ showing up (indicated byIt).
• Three long-lived sellers: incumbents (A&B) authentic;entrant (C) authentic with prob π.Only authentic sellers deliver.
• Quality of service q = (qA, qB , qC ) i.i.d. and public,[q, q].Interpreted as probability of success, upon which buyersget unit utility.
• Service production cost k.
Slide 7/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Setup
• Risk-neutral, discrete time t = 1, 2, · · · .
• Buyers: unit measure, short-lived;Aggregate shock: probability λ showing up (indicated byIt).
• Three long-lived sellers: incumbents (A&B) authentic;entrant (C) authentic with prob π.Only authentic sellers deliver.
• Quality of service q = (qA, qB , qC ) i.i.d. and public,[q, q].Interpreted as probability of success, upon which buyersget unit utility.
• Service production cost k.
Slide 7/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Setup
• Risk-neutral, discrete time t = 1, 2, · · · .
• Buyers: unit measure, short-lived;Aggregate shock: probability λ showing up (indicated byIt).
• Three long-lived sellers: incumbents (A&B) authentic;entrant (C) authentic with prob π.Only authentic sellers deliver.
• Quality of service q = (qA, qB , qC ) i.i.d. and public,[q, q].Interpreted as probability of success, upon which buyersget unit utility.
• Service production cost k.
Slide 7/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Timeline and Assumption
q realized.
t C decides entry(if not yet).
Sellers quote prices.Buyers shop sellers.
Service outcome realized.
New q realized.
t+1
Assumption 1: In traditional world, no payment can becontingent on whether service delivery occurs or not. Eachseller can only observe his own buyers and associatedtransaction information.
Slide 8/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Timeline and Assumption
q realized.
t C decides entry(if not yet).
Sellers quote prices.Buyers shop sellers.
Service outcome realized.
New q realized.
t+1
Assumption 1: In traditional world, no payment can becontingent on whether service delivery occurs or not. Eachseller can only observe his own buyers and associatedtransaction information.
Slide 8/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Reputation and Entry
Proposition
In a competitive equilibrium, the first time C can servecustomers is in periodτ ≡ min{t ≥ 0|πqC ,tIt ≥ max{qA,t , qB,t}} or later.Consequently, C never enters if πq < q.
• Reputation π helps but entry still inefficient.
• We focus on q > πq. .
Slide 9/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Collusive Equilibria
• Collusion (f ,T ): Green and Porter (1984); Friedman(1971)
• Collusion phase: f (qA, qB), pA = qA, pB = qB
• Punishment phase: triggered by deviation or aggregateshockseeing no buyer (imperfect public monitoring), punish Tperiods.
• M1 = E [f (q)(q − k)],M2 = E [(qi −maxj 6=i qj)+],M3 =
maxq{(1− f (q))(q − k)}, then
Proposition
The discount threshold δTraditionalo ≡ inff1λ
M3M1+M3−M2
is
well-defined and positive. When δ < δTraditionalo , no collusionequilibrium exists for any (T , f ).
Slide 10/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Collusive Equilibria
• Collusion (f ,T ): Green and Porter (1984); Friedman(1971)
• Collusion phase: f (qA, qB), pA = qA, pB = qB
• Punishment phase: triggered by deviation or aggregateshockseeing no buyer (imperfect public monitoring), punish Tperiods.
• M1 = E [f (q)(q − k)],M2 = E [(qi −maxj 6=i qj)+],M3 =
maxq{(1− f (q))(q − k)}, then
Proposition
The discount threshold δTraditionalo ≡ inff1λ
M3M1+M3−M2
is
well-defined and positive. When δ < δTraditionalo , no collusionequilibrium exists for any (T , f ).
Slide 10/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
The Trust Machine
• Assumption 2: New Informational EnvironmentBlockchain enables decentralized consensus, and buyersand sellers can write smart contracts that are contingenton the service outcome associated with their owntransaction. In order to reach decentralized consensus,aggregate service activities are publicly observable onblockchain.
Proposition
With smart contracts, the entrant C enters almost surely, andfirst gets customers in periodτ = min{t ≥ 0|qC ,tIt ≥ max{qA,t , qB,t}} or earlier.
• Greater entry and competition:E[q(1)] > E[max{qA, qB}].
• Welfare and consumer (buyer) surplus are higher.Slide 11/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
The Trust Machine
• Assumption 2: New Informational EnvironmentBlockchain enables decentralized consensus, and buyersand sellers can write smart contracts that are contingenton the service outcome associated with their owntransaction. In order to reach decentralized consensus,aggregate service activities are publicly observable onblockchain.
Proposition
With smart contracts, the entrant C enters almost surely, andfirst gets customers in periodτ = min{t ≥ 0|qC ,tIt ≥ max{qA,t , qB,t}} or earlier.
• Greater entry and competition:E[q(1)] > E[max{qA, qB}].
• Welfare and consumer (buyer) surplus are higher.Slide 11/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Trust-Machine for Collusion
• Collusion using smart contract:
• The same consensus and automated execution can helpincumbents.
• Punishment upon deviation→ any collusion can be sustained.
• Likely prohibited by anti-trust laws.
• Greater public information on service activities.
• Based on the aggregate information, aggregate noisecan be filtered out.
• Can more accurately punish deviations usingcontinuation value.
Slide 12/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Trust-Machine for Collusion
• Collusion using smart contract:
• The same consensus and automated execution can helpincumbents.
• Punishment upon deviation→ any collusion can be sustained.
• Likely prohibited by anti-trust laws.
• Greater public information on service activities.
• Based on the aggregate information, aggregate noisecan be filtered out.
• Can more accurately punish deviations usingcontinuation value.
Slide 12/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Trust-Machine for Collusion
• Collusion using smart contract:
• The same consensus and automated execution can helpincumbents.
• Punishment upon deviation→ any collusion can be sustained.
• Likely prohibited by anti-trust laws.
• Greater public information on service activities.
• Based on the aggregate information, aggregate noisecan be filtered out.
• Can more accurately punish deviations usingcontinuation value.
Slide 12/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Trust-Machine for Collusion
• Collusion using smart contract:
• The same consensus and automated execution can helpincumbents.
• Punishment upon deviation→ any collusion can be sustained.
• Likely prohibited by anti-trust laws.
• Greater public information on service activities.
• Based on the aggregate information, aggregate noisecan be filtered out.
• Can more accurately punish deviations usingcontinuation value.
Slide 12/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Trust-Machine for Collusion
• Collusion using smart contract:
• The same consensus and automated execution can helpincumbents.
• Punishment upon deviation→ any collusion can be sustained.
• Likely prohibited by anti-trust laws.
• Greater public information on service activities.
• Based on the aggregate information, aggregate noisecan be filtered out.
• Can more accurately punish deviations usingcontinuation value.
Slide 12/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Enhanced Collusion
• Tacit collusion with permissioned blockchain
Proposition
Compare the thresholds above which the specified collusionstrategy is an equilibrium. We have
δBlockchain2(T ,f ) < δTraditional(T ,f )
Corollary
When δ ∈[inff {δBlockchain2(∞,f ) }, δTraditionalo
), there cannot be
collusion without blockchain, but there could be withblockchain.
Slide 13/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Enhanced Collusion
• Tacit collusion with permissioned blockchain
Proposition
Compare the thresholds above which the specified collusionstrategy is an equilibrium. We have
δBlockchain2(T ,f ) < δTraditional(T ,f )
Corollary
When δ ∈[inff {δBlockchain2(∞,f ) }, δTraditionalo
), there cannot be
collusion without blockchain, but there could be withblockchain.
Slide 13/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Blockchain Disruption
• Public blockchain: entry and collusion
• Collusion phase: f̂ (qi , qj , qk) allocation function
• Punishment phase: no buyers conditional on buyers’presence.
Proposition
The discount threshold δBlockchain3o ≡ inf f̂ {δBlockchain3(∞,f̂ ) } is
well-defined and satisfies δBlockchain3o < 1. For allδ > δBlockchain3o , there exists a collusion equilibrium withblockchain such that the consumer surplus is lower than thatin any equilibrium in the traditional world.
Slide 14/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Blockchain Disruption
• Public blockchain: entry and collusion
• Collusion phase: f̂ (qi , qj , qk) allocation function
• Punishment phase: no buyers conditional on buyers’presence.
Proposition
The discount threshold δBlockchain3o ≡ inf f̂ {δBlockchain3(∞,f̂ ) } is
well-defined and satisfies δBlockchain3o < 1. For allδ > δBlockchain3o , there exists a collusion equilibrium withblockchain such that the consumer surplus is lower than thatin any equilibrium in the traditional world.
Slide 14/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Blockchain Disruption
Proposition
For m ≥ n ≥ 2, if λ < n−1n , then δTraditional ,no > δBlockchain,mo ,
where m and n indicate the number of colluding sellers withand without blockchain respectively. Consequently for allδ ∈ [δBlockchain,mo , 1), there is no collusion in the traditionalworld with n incumbents, while there can be collusion withblockchain with m sellers that reduces consumer surplus.
Slide 15/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Blockchain Disruption
Theorem
The discount threshold δBlockchain3a ≡ supf {δBlockchain3(∞,f̂ ) } is
well-defined and satisfies δBlockchain3a < 1. For allδ > δBlockchain3a , any consumer surplus and welfare attainablein the traditional world can be attained with blockchain, andsome additional equilibria with higher or lower consumersurplus or welfare can also be sustained.
Corollary
The most collusive equilibrium with blockchain, whichgenerates the highest payoff to the sellers, improves socialwelfare but results in strictly lower consumer surplus,compared to any equilibrium outcome in the traditional world.
Slide 16/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Blockchain Disruption
Theorem
The discount threshold δBlockchain3a ≡ supf {δBlockchain3(∞,f̂ ) } is
well-defined and satisfies δBlockchain3a < 1. For allδ > δBlockchain3a , any consumer surplus and welfare attainablein the traditional world can be attained with blockchain, andsome additional equilibria with higher or lower consumersurplus or welfare can also be sustained.
Corollary
The most collusive equilibrium with blockchain, whichgenerates the highest payoff to the sellers, improves socialwelfare but results in strictly lower consumer surplus,compared to any equilibrium outcome in the traditional world.
Slide 16/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Private Qualities and Allocative Inefficiency
q is privately observed in addition to uncertain authenticity.
Lemma
In the traditional world, sellers will post the same pricepi = k , and the buyer will select (randomly) one of them fortransaction need. The expected buyer’s surplus and socialwelfare per period is E[q]− k .
Slide 17/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Private Qualities and Allocative Inefficiency
q is privately observed in addition to uncertain authenticity.
Lemma
In the traditional world, sellers will post the same pricepi = k , and the buyer will select (randomly) one of them fortransaction need. The expected buyer’s surplus and socialwelfare per period is E[q]− k .
Slide 17/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Equilibrium Contracts and Economic Outcomes
q is privately observed in addition to uncertain authenticity.
Proposition
The smart contracts the sellers offer in equilibrium are all ofthe form (p, p − 1), where p is the price a buyer pays uponsuccess, and 1− p is the compensation a buyer receives uponfailure.
Corollary
Smart contracts fully resolve informational asymmetry in anymarket equilibrium, and welfare and consumer surplus areindependent of whether seller qualities are private or not.
Welfare and consumer surplus improve.
Slide 18/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Equilibrium Contracts and Economic Outcomes
q is privately observed in addition to uncertain authenticity.
Proposition
The smart contracts the sellers offer in equilibrium are all ofthe form (p, p − 1), where p is the price a buyer pays uponsuccess, and 1− p is the compensation a buyer receives uponfailure.
Corollary
Smart contracts fully resolve informational asymmetry in anymarket equilibrium, and welfare and consumer surplus areindependent of whether seller qualities are private or not.
Welfare and consumer surplus improve.
Slide 18/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Regulation and Blockchain Competition
• Noise injection on service activities.
• Making monitoring more imperfect.
• Blockchain competition: a number of segmentedblockchains
• No customer if offering collusive price.
• Only tacit collusion across platforms.
Slide 19/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Regulation and Blockchain Competition
• Noise injection on service activities.
• Making monitoring more imperfect.
• Blockchain competition: a number of segmentedblockchains
• No customer if offering collusive price.
• Only tacit collusion across platforms.
Slide 19/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Smart Contract Design
• Improving consumer surplus conditional on maximizingwelfare.
• Smart contract design: pf = 0.
• General Symmetric Mechanism design
• Optimal smart contract and market mechanismimplements the optimal mechanism.
Slide 20/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Smart Contract Design
• Improving consumer surplus conditional on maximizingwelfare.
• Smart contract design: pf = 0.
• General Symmetric Mechanism design
• Optimal smart contract and market mechanismimplements the optimal mechanism.
Slide 20/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Conclusion
• Blockchain and Smart Contract
1 Decentralized consensus, low-cost, tamper-proofalgorithmic execution.
2 Greater information distribution and contractibility:Smart Contracts.
3 Consensus generation: information distribution vsprivacy.
• Economic impact on competition.
1 Mitigates information asymmetry; facilitates entry andcompetition.
2 More perfect monitoring; enhance collusion.3 Regulation and smart contract design
Slide 21/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts
Intro & Background Traditional World Blockchain World Info Asym & Contracts Regulation & Design
Conclusion
• Blockchain and Smart Contract
1 Decentralized consensus, low-cost, tamper-proofalgorithmic execution.
2 Greater information distribution and contractibility:Smart Contracts.
3 Consensus generation: information distribution vsprivacy.
• Economic impact on competition.
1 Mitigates information asymmetry; facilitates entry andcompetition.
2 More perfect monitoring; enhance collusion.3 Regulation and smart contract design
Slide 21/21 — Cong, He, & Zheng — Blockchain Disruption and Smart Contracts