The blockchain and the problem of social cost

Edoardo Martino (University of Amsterdam)

Abstract

In the past decade, the legal and economic literature on blockchain technology and its applications flourished. However, a sensible Law & Economics framework for the analysis of the blockchain seems to be missing.
This article aims to fill this gap by looking at blockchain technology through Coasean lenses. According to the “Coase Theorem”, decentralised decision-making is superior in handling externalities compared to centralised regulation. This holds true so long as property rights are clearly allocated and transaction costs are negligible.
The article shows that much of the enthusiastic views on the blockchain promises comes from fundamental misconceptions on these assumptions. Against this background, the article discusses the externalities generated in the blockchain, explains why these externalities cannot be fixed by the decentralised actors acting on the blockchain and discusses the preferable legal strategies to handle these externalities.

Keywords: blockchain technology, Coase theorem, social cost, transaction costs, trust.

JEL Codes: K11; K22; K29

[Note: the file attached is incomplete and can be considered an extended abstract. The draft will be complete before the conference]

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