As a general purpose technology (GPT), blockchain has the opportunity to generate widespread impact across many different industries. From healthcare to supply-chain, estimates of potential value creation have been cited in the trillions of dollars. While use-cases are still being conceptualized and properly positioned, economics points to a few levers to for how this value will be generated. These are the Three C’s.
Innovations like blockchain deliver value by reducing inefficiencies.
Inefficiencies arise when parties engaging in trade are prevented from reaching the best possible collective outcome, either due to frictions such as search costs, or due to incentive problems such as free-riding or the hold-up problem.
Blockchain’s shared ownership structure can reduce inefficiencies in a wide variety of settings through three levers: Coordination, Commitment, and Control.
Blockchain allows a group of stakeholders to coordinate on a shared database for their common use. It creates a source of instantly verifiable information among this group, reducing the frequently substantial costs of communicating and reconciling data across different sources.
Blockchain, together with smart contracts, allows participants to commit to future actions and outcomes using code to enforce them. This reduces inefficiencies that arise due to contractual incompleteness, such as the risk of one of the parties reneging on a previous agreement and the cost of enforcing agreement. While smart contracts do not solve contractual incompleteness in its entirety, they do provide valuable tools to lessen its impact under certain circumstances.
Blockchain enables stakeholders to retain local control of their data, thereby balancing bargaining power among participants. It thereby allows these stakeholders to capture more of the value they create, improving incentives for participation and investment.
The specific benefits of employing blockchain in a given setting depend on the context at hand, and the relative costs and benefits of addressing various inefficiencies. For shared databases, all three of these channels can be used to improve outcomes for participants.
In order to maximize the impact of each of these elements and prevent economic system failure, enforcement mechanisms such as those that monitor and review actors’ behavior and impose penalties may be designed so that value destroying behaviors are deterred and align stakeholder incentives are aligned.
For further reading about the principles of the Three C’s in the context of case-studies, read Prysm Group’s research report: Can Blockchain Solve the Hold-Up Problem for Shared Databases?