Title: Economic Implications of Blockchain Platforms,
Abstract: In an economy with asymmetric information, the smart contract in the
blockchain 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 recomposes the asymmetric
information and generates spreads in asset price and quality between itself and
a 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. Moreover, a blockchain 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.