Template-Type: ReDIF-Paper 1.0
Author-Name: Raphael Auer
Author-X-Name-First: Raphael
Author-X-Name-Last: Auer
Author-Name: Cyril Monnet
Author-X-Name-First: Cyril 
Author-X-Name-Last: Monnet
Author-Name: Hyun Song Shin
Author-X-Name-First: Hyun Song 
Author-X-Name-Last: Shin
Title: Distributed ledgers and the governance of money
Abstract: Blockchain technology breathes new life into the classical analysis of money as a substitute for a ledger of all past transactions. On this view, money is a record of goods sold and services rendered. While blockchain technology involves updating the ledger through a decentralised consensus on the unique truth, the robustness of the equilibrium that supports this consensus depends on who has access to the ledger and how it can be updated. To find the optimal solution, Buterin's "scalability trilemma" needs to be addressed, so that a workable balance can be found between decentralisation, security (i.e. a robust consensus), and scale (ie the efficient volume of transactions). Using a global game analysis of an exchange economy with credit, we solve for the optimal ledger design that balances the three objectives of this trilemma. We find that, depending on dynamic incentives, either decentralised or centralised designs can be optimal, with the case for decentralisation being stronger in myopic markets.
Length: 64 pages
Creation-Date: 2021-01
File-URL: https://www.bis.org/publ/work924.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work924.htm
File-Format: text/html
Number: 924
Keywords: digital currencies, money, distributed ledger, blockchain, coordination game, global game, consensus, market design
Classification-JEL: C72, C73, D4, E42, G2, L86
Handle: RePEc:bis:biswps:924