Scaling Smart Contracts via Layer-2 Technologies: Some Empirical Evidence / Lin William Cong, Xiang Hui, Catherine Tucker, Luofeng Zhou.

Format:

Book

Author/Creator:

Cong, Lin William.

Contributor:

National Bureau of Economic Research.

Hui, Xiang.

Tucker, Catherine.

Zhou, Luofeng.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30912.

NBER working paper series no. w30912

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

Blockchain-based smart contracts can potentially replace certain traditional contracts through decentralized enforcement and reduced transaction costs. However, scalability is a key bottleneck hindering their broader application and adoption, often leading to concentrated or exclusive networks. To avoid falling short of the original promise of the technology, firms actively explore "layer-2" methods for scaling. We provide some initial evidence on the economic implications of a layer-2 scaling solution, which moves information aggregation from on-chain to off-chain peer-to-peer networks. A parallel-system experiment allows clean identification because we observe the same unit in the treatment and control systems at the same time. We find that this scaling solution reduces operating costs by 76%, and importantly, leads to decentralization with lower market concentration and more participation, which in turn improves data accuracy. The findings provide initial evidence of how blockchain and smart contracting technologies evolve towards achieving decentralized and scalable trust.

Notes:

Print version record

February 2023.