A Brief adventure of Blockchain - A Reality

In October 2008, a few weeks after the Emergency Economic Stabilization Act rescued the U.S. financial system from collapse, Satoshi Nakamoto introduced a cryptography mailing list to Bitcoin, a peer-to-peer electronic cash system "based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party." With Bitcoin, the internet was about to experience the effects of a drastic reduction in two related costs: 1) the cost of verification; and 2) the cost of networking.1 For the first time in history value could be reliably transferred between two distant, untrusting parties without the need of a costly intermediary. Through a clever combination of cryptography and incentives, the blockchain - the distributed public ledger recording every bitcoin transaction - could be used by any participant in the network
to query and verify the state of a particular transaction in the digital currency. Thanks to market rules designed to incentivize the propagation of new, legitimate transactions, to reconcile conflicting information, and to ultimately reach consensus at regular intervals about the true state of the ledger in an environment where not all participating nodes can be trusted (e.g. as during a malicious attack to the network), Bitcoin was the first example, at scale, of costless verification. It was also the first example of how a secure network could be bootstrapped without investments by a selected set of 'network operators', but by relying instead on the individual incentives of every participant in the network. As of November 2016, with a market capitalization of approximately $12B, Bitcoin was not only the most diffused2 and secure3 cryptocurrency, but also an example of how, as the cost
of verification and networking drop dramatically, new types of transactions, intermediation and business models become available. Because of how it provides incentives for maintaining a ledger in a fully decentralized way :

Whereas the cost of implementing a centralized network has drastically fallen with the internet, the cost of running a distributed, decentralized network was still high before the introduction of blockchain technology.
The market capitalization is calculated as the number of tokens in circulation times
the value of each token. The second largest cryptocurrency, Ethereum,
had less than $1B market cap.
*In a proof-of-work blockchain such as the one used by Bitcoin, the security of the public ledger depends on the amount of computing power that is dedicated to verifying and extending the log of transactions over time (i.e. that is dedicated to "mining").

Bitcoin is also the first example of how an open protocol can be used to implement a marketplace without the need of a central actor. Furthermore, as the core protocol is extended (e.g. by adding the ability to store documents through a distributed file-storage system4), as we will see the market enabled by a cryptocurrency becomes a flexible, permissionless development platform for novel applications. In this paper, we rely on economic theory to explain how costless verification and lower networking
costs change the types of transactions that can be supported in the economy, and to identify the types of problems blockchain technology (also known as distributed ledger technology) is likely to have an impact on versus not. Whereas the utopian view has argued that blockchain technology will affect every market by reducing the need for intermediation, we argue that it is more likely to change the scope of intermediation both on the intensive margin of transactions (e.g., by reducing costs and possibly influencing market structure) as well as on the extensive one (e.g., by allowing for new types of marketplaces). Furthermore, for the technology to have any impact in a specific market, verification of transaction attributes (e.g., status of a payment, identity of the agents involved etc.) by contracting third-parties needs to be currently expensive; or network operators must be enjoying uncompetitive rents from their position as trusted nodes above and beyond their added value in terms of market design. The paper proceeds as follows: in the next Section, we discuss the economics of costless verification and the related reduction in networking costs. In Section 3, we discuss how different market design choices in the development of a blockchain application change its economics. In section 4 we use our theoretical framework to present different applications of blockchain technology.