Proof of Work as a Three-Sided Market

Abstract

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Blockchain technology is the distributed ledger technology underlying Bitcoin and other cryptocurrencies. We apply Oliver Williamson's transactions cost analysis to a proof of work blockchain consensus mechanism. Blockchains reduce the costs of opportunism, but are not “trustless.” We show that blockchains are trust machines. Blockchains provide for three-sided bargaining that convert energy-intensive computation into economically-valuable trust in a proof of work context.

Keywords

• blockchain
• transaction costs
• industrialization
• proof of work
• trust