Money

Money and payment systems play a key role in our economies. It would be extremely difficult for an economy to operate if agents did not have the ability to use money to pay for goods and services, and to store value. Economists, from Wicksell (1901) to Kiyotaki and Wright (1993), have clarified why money is essential, showing how it facilitates mutually beneficial transactions, by mitigating search costs and market incompleteness.

For money to be useful, it must be possible to verify its ownership. Consider the example of Alice offering money to buy goods or services from Bob. Bob needs to verify that Alice’s offer is trustworthy, i.e. that Alice does have money and the money she has is not fake. In the old days, Alice would show her gold or silver coins and experts would verify their precious metal content. In contrast, now that money is scriptural, to verify the validity of Alice’s offer, one needs to rely on a ledger recording money ownership. Inspecting this ledger, Bob can check that Alice has the money on her account, so that the transaction is valid.

Traditionally, the supply of money and the maintenance of ledgers registering its ownership have been overseen and managed by central authorities, such as central banks and commercial banks. Thus, centralised authorities such as commercial banks and central banks can be thought of as the agents to whom citizens delegate the management of money and payments.

For this delegation to be beneficial for citizens, the central authorities must be trustworthy. In contrast, the delegation of money and payment to centralised authorities can be costly for citizens when these centralised authorities cannot be fully trusted, and there is information asymmetry about their actions.
For example, Farhi and Tirole (2012) show how banks can take excessive risk and create collective moral hazard, while central banks can be unable to prevent the corresponding destabilisation of the financial and monetary system.

To avoid these problems, it could be useful to decentralise the supply of money and the management of the ledger recording its ownership. Decentralising the management of money and payment means delegating it to several agents instead of a single (or a small number of) central authority(ies). This in the line with von Hayek (1976)’s plea for “the replacement of the government monopoly of money by competition in currency supplied by private issuers”. From Hayek’s point of view, the problem with central authorities is that they have a monopoly. When the task is decentralised to several agents, in contrast, even if the agents cannot be individually trusted, according to Hayek competition will keep them in check.

Extending the scope of feasible institutional arrangements beyond those available at the time of Hayek, recent advances in computer science have created a new tool for the decentralisation of money: blockchain.

Decentralised ledgers and money

Blockchain was launched amid the great financial crisis, in defiance of centralised authorities such as banks, central banks, and governments. In 2009 the first block in the Bitcoin blockchain (the genesis block) included the words “Chancellor on brink of second bailout for banks”, which referred to central banks bailing out distressed banks. So, from the start, the goal of blockchain was to decentralise money and payment, to avoid the problems associated with their delegation to central authorities.

The abstract of the seminal white paper of Nakamoto (2008), which was at the origin of the Bitcoin blockchain, expressed this goal:

A purely peer-to-peer version of electronic cash [allowing] online payments to be sent directly from one party to another without going through a financial institution…

A blockchain is a decentralised ledger in which the information is structured in blocks of data, and which is replicated among different participants maintaining it, without not necessarily knowing or trusting each other. With blockchain, the management of the ledger, instead of being in the hands of a single central authority, is performed by a network of nodes. That is why it is decentralised.
 

For the decentralised ledger implemented by the blockchain to be useful, it must be that all recorded transactions are valid.
Validity implies, in particular, that, as in the case of Alice and Bob example above, the buyer actually owns the money she promises to transfer to the buyer as payment.
Since the nodes participating in the blockchain process are in charge of the verification of the validity of the transactions registered in the decentralised ledger, they are often referred to as ‘validators’.

One of the main challenges with blockchains is to ensure that the validators reach a consensus on the ledger. When there is consensus, all participants have locally the exact same ledger, information added in the ledger of one participant is added in the ledger of the other participants in the same order, and all transactions in the ledger have been verified by validators.

How can individual nodes, who don’t know one another, reach such a consensus? The answer is that the design of a blockchain includes the specification of a protocol, suggesting the sequence of actions that nodes should take to process transactions and maintain the ledger.

Figure 1 The average time between consecutive blocks in Bitcoin is stable at around 10 minutes

Source: Constructed using data from bitcoinvisuals.com

But will the nodes follow the protocol? After all, there is no central authority to control them, make sure they take the right action, and punish them if they don’t. In practice, the Nakamoto protocol, used by Bitcoin has operated faultlessly since 2008. There has been no successful attack, and the Bitcoin blockchain has proceeded steadily, adding one block (almost exactly) every 10 minutes as prescribed by the protocol (see Figure 1), without any intervention from a central authority. This impressive success is likely to be due to Nakamoto (2008)’s key insight that the blockchain nodes will follow the protocol if it is in their interest to do so, i.e., if the protocol is incentive compatible. As discussed by Biais et al. (2019a, 2019b) and Amoussou-Guenou et al. (2024), two important instruments are used to provide incentives for blockchain validators.

• The first one is to ensure that participating nodes stand to gain if they follow the protocol. Thus, rewards are promised to those who follow the protocol. The allocation of rewards, however, must also be decentralised. This rules out relying on an outside centralised authority using bank transfers to allocate dollars or euros as rewards. Therefore, the blockchain needs to have its own native currency, living on the blockchain, and allocated as a reward by validators following the protocol. Thus, the first blockchain relies both on a protocol (the Bitcoin protocol) and a cryptocurrency (bitcoin).
• The second key instrument is to ensure that participating nodes stand to lose if they don’t follow the protocol. The idea that validators must have something at stake inspired the design of the proof-of-stake protocol.
   For example, in the Ethereum proof-of-stake protocol, validators must stake 32 ether. Validators know that, if they deviate from the protocol and this harms the consensus process, this will likely reduce the value of native cryptocurrency, and therefore the value of their stake. Moreover, the protocol specifies that, if these validators are observed to deviate from the protocol, they must be slashed, i.e., some of their 32 ether must be taken away from them.

Thus, blockchain technology has made it possible to decentralise money, by supporting cryptocurrencies whose ownership is registered on blockchain.Pagnotta (2022) offers an insightful early analysis of money decentralisation with blockchain. The two largest cryptocurrencies are bitcoin and ether.  At the time of writing (February 2026), the total stock of bitcoins is worth more than $1 trillion (more than 4 % of US GDP) and that of ether almost half a trillion dollars. This is quite an achievement.

Decentralised contracts and markets

Once a decentralised ledger and native cryptocurrencies have been successfully deployed, one can move to the second stage: decentralised contracts (i.e. smart contracts). A smart contract is a computer program, deployed on blockchain, whose goal is to execute prespecified instructions, in a decentralised manner, when prespecified conditions are met (Buterin 2014).

Importantly, a smart contract can be written and deployed by anyone, an individual or a group. Unlike traditional contracts, which presuppose an explicit agreement between identified parties and rely on external enforcement, smart contracts do not require prior consent among specific participants; rather, any agent may choose to interact with them, thereby implicitly accepting the rules encoded in their logic. This shift marks a profound transformation from agreement-based to code-based enforcement of commitments.

Once cryptocurrencies and smart contracts can be registered in a blockchain, it becomes possible to use them to offer financial services. This new development is referred to as ‘decentralised finance’, or DeFi (Niepelt, 2025). The three most frequent types of DeFi smart contracts correspond to lending and borrowing, real world assets tokenisation, and decentralised exchanges. Stablecoins
are also an important case of DeFi smart contracts.

Figure 2 Market share of the different builders on the Ethereum blockchain

Source: https://explorer.rated.network/builders

One of the most promising developments DeFi is decentralised exchanges relying on automated market makers (AMM). AMMs are smart contracts committed to supplying liquidity according to predetermined terms. The literature, however, has shown that market failures characteristic of traditional financial markets, such as adverse selection and front running, also affect AMMs.  Moreover, while Defi builds on blockchain whose goal was to avoid intermediaries, it has created new types of intermediaries, such as the “builders”, who set up the blocks of transactions to be appended to the Ethereum blockchain. As shown by Capponi et al. (2024) economies of scale lead to the emergence of large builders, as illustrated in Figure 2, who can extract rents from users and validators.

Conclusion

Blockchain has been extremely successful, but now faces major challenges:

• It must solve the coordination problems arising in decentralised environments with multiple equilibria, such as cryptocurrency valuation (Garratt and Wallace 2018, Biais et al. 2023) or the decision whether to follow a blockchain protocol or not (Biais et al. 2019b, Amoussou-Guenou et al. 2024).
• It must link the on-chain world with the off-chain world, by tokenising off-chain assets such as securities or real estate, and by ensuring that oracles are incentive compatible (Garratt and Monnet 2023).
• It must fend off the opportunistic behaviour of strategic actors, such as large strategic token holders in DAOs (Rossello 2025), or front runners engaging in sandwich attacks in decentralised exchanges (Park 2023).
• And it must avoid concentration of key functions in the blockchain process, such as block validation (miners, proposers; see Auer et al. 2025) or block construction (builders; see Capponi et al, 2024).

New research and innovative developments are needed to meet these challenges, and we believe they will be particularly fruitful if they combine the expertise of economists with that of computer scientists.

References

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