In an economy with asymmetric information, the smart contract in the blockchain platform and protocol mitigates uncertainty. Since, as a new trading platform, the blockchain triggers segmentation of market and differentiation of agents in both the sell and buy sides of the market, it reconfigures the asymmetric information and generates spreads in asset price and quality between itself and traditional platform.

We show that marginal innovation and sophistication of the smart contract have non-monotonic effects on the trading value in the blockchain platform, its fundamental value, the price of cryptocurrency, and consumers’ welfare. A blockchain platform manager who
controls the level of the innovation of the smart contract has an incentive to keep it lower than the first best when the underlying information asymmetry is not severe, leading to welfare loss for consumers.

Discover the difference between the economies on two transaction platforms – the blockchain and traditional fiat system – and how the implications differ.

This piece of literature proposes a simple yet intuitive theory that explores the economic implications of blockchain technology. The primary focus is on the blockchain as a new platform for exchanging goods and assets. Given that the technology aims to improve information management, the authors consider an asymmetric information problem regarding the assets traded.

Since the blockchain platform is operated in parallel with a traditional exchange with no blockchains, it has the features of a multi-platform economy with two-sided markets, as described in the field of industrial organisation (IO). This piece investigate how innovation in blockchain technology affects the segmentation of the trading platforms, the price and quality of the assets traded, information asymmetry, and consumers’ welfare.