Platform Precommitment via Decentralization

PlatformPrecommitmentviaDecentralization MarcoReuterWP/24/28 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 FEB ©2024InternationalMonetaryFundWP/24/28 IMFWorkingPaper ResearchDepartment PlatformPrecommitmentviaDecentralizationPreparedbyMarcoReuter* AuthorizedfordistributionbyMariaSoledadMartinezPeria February2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Istudyanentrepreneur’sincentivestobuildadecentralizedplatformusingablockchain.Theentrepreneurcaneitherbuildtheplatformusingaregularcompanyandretaincontroloftheplatform,orbuildtheplatformusingablockchainandsurrendercontroloftheplatform.Ineithercase,theplatform’susersexperiencealocked-ineffect.Ishowthatadecentralizedimplementationoftheplatformisboth(i)moreprofitablefortheentrepreneurand(ii)aParetoimprovement,ifandonlyifthesizeofthelocked-ineffectexceedssomethreshold.Further,progressivedecentralizationthroughairdropscanbeoptimal. JELClassificationNumbers: C70,D00,D2,D4,L2 Keywords: blockchain;smartcontracts;decentralization;cryptocurrency;commitment;platforms Author’sE-MailAddress: mreuter@imf.org *IthankThomasTr¨ogerforhiscontinuedsupport.IalsothankPiotrDworczak,VitaliGretschko,Carl-ChristianGroh,FedericoInnocenti,ScottDukeKominers,VolkerNocke,MarionOtt,JonasvonWangenheimandaudiencesata16zcrypto,CRCTR224,DICE,theEWMES2022,theIMF,MaCCI,NYUStern,andtheUniversityofZurichforinsightfulcomments.MostofthepaperwaswrittenwhiletheauthorwasattheUniversityofMannheim’sGraduateSchoolofEconomicandSocialSciencesandamemberofCRCTR224(ProjectB01)supportedbytheDFG(GermanResearchFoundation).Theirsupportisgratefullyacknowledged.Previousversionsofthispapercirculatedunderthetitle”TheValueofDecentralizationUsingTheBlockchain”. WORKINGPAPERS PlatformPrecommitmentviaDecentralization PreparedbyMarcoReuter IIntroduction Moreandmoreentrepreneursarebuildingdecentralizedplatformsusingblockchains.Overthelastyears,venturecapitalinvestmentsintoWeb3startupshavetotaledover$87billionandanaverageof20,000to30,000developershavebeenbuildinginthespace.1Whatisdrivingentrepreneurstobuilddecentralizedplatforms?Inthispaper,Iarguethatplatformstartupsfacetheproblemofbeingunabletocrediblycommittonotchangethetermsoftheplatforminthefuturetothedetrimentoftheplatform’susers,whichcausesahold-upproblem.Forexample,manyplatformssuchasGoogle,FacebookorYouTubestartedwithnoadvertisementandhavesteadilyincreasedadvertisementovertime.Additionally,manylargeplatformshavebeenthetargetofantitrustinvestigationsandunderscrutinyfortheir(mis)useofuserdata.Ifusersareforward-looking,thean-ticipationofworseningconditionscausesareluctancetojointheplatformforafearoffutureexploitation.Inthispaper,Ishowthatdecentralizationcaneffectivelyremedythehold-upproblemandbebeneficial,forboththeentrepreneurandtheplatform’susers.Thatsaid,hold-upproblemshavebeenextensivelystudiedineconomics,anddecentral-izationusingablockchainisnottheonlyapproachtosolvethem.Forexample,hold-upproblemscanberemediedthroughtheuseofcontracts,howevercontractscansufferfromincompleteness(HartandMoore(1988),HartandMoore(1999)).Further,decentraliza-tioncantakeplacewithoutablockchain.Forexample,aplatformcouldbeorganizedasacooperative,ensuringcooperationtowardsamutualgoal.However,membersofacooperativetypicallyshareacommonlocalityandlegalsystem.Forinternetbasedplatformswithuserbasesthatspantheglobe,blockchainbaseddecentralizationmaybeatechnologicallysuitableoption.2Thatsaid,mostofthepointsinthepapercanbeunderstoodwhileconsideringdecentralizationperse,andblockchainasatechnologicaldevicethatenablesdecentralization.3 Inthispaper,Idevelopatheoreticalmodelthatdetermineswhenanentrepreneurpreferstoimplementaplatforminacentralizedmannerandwhenitisoptimaltode-centralizethroughtheuseofablockchain.Withthat,Icontributetotheliteraturecon-sideringblockchainandtokenbasedplatforms(i.e.SockinandXiong(2023),Goldstein,GuptaandSverchkov(2019),ChodandLyandres(2023),Cong,LiandWang(2022)),byexaminingtheoptimalchoicebetweencentralizationanddecentralizationinadynamicmodelthatincorporatesnetworkeffects,growthandlocked-ineffects.Locked-ineffectsarethecorefrictionatplay.Iassumethatusersoftheplatformaresubjecttoalocked-in 1CrunchbaseWeb3Trackeranda16zStateofCryptoIndex 2ExamplesofplatformsthathavedecentralizedtheirgovernancethroughblockchainsincludeUniswap,MakerDAOandmanyothers. 3Theverifiability,trustandimmutabilitythatblockchainsprovidemaybecriticaltechnologicalaspectstoallowlargeamountsofuserstoeffectivelycooperatewitheachother. effect,forexampleduetoswitchingcosts.4Ifthefrictionsthatariseduetothepotentialofexploitingthislocked-ineffectbytheentrepreneuraresufficientlylarge,Ishowthatanentrepr