Market Failure in Blockchain Context

Published by Mario Oettler on

In blockchain, positive externalities arise through the provision of a full node. The full node operator’s benefit is to have access to accurate transaction data. But it also contributes to the overall safety of the network by relaying transactions, verifying blocks, and providing data to other full nodes and light clients.

The more full nodes are available, the safer the system. This service, however, is unpaid. So, the number of full nodes can be too low compared to the social optimum.

Another field where positive externalities are not sufficiently rewarded is research. Every blockchain has to improve. This touches the security of the signatures, the scaling techniques like rollups and sharding, transaction fee schemes, or consensus protocols. The researcher himself has not much benefit. But the whole network benefits from it. The safer a system is or the better it scales, the more users are willing to use it and the higher is the value of the coins and services working on it.