Blockchain Technology as Economic Infrastructure: Revisiting the Electronic Markets Hypothesis
Open accessAbstract
In the late 1980s and early 1990s the electronic markets hypothesis offered a prediction about effect of information technology on industrial organisation, and many business writers forecast significant changes to the shape and nature of the firm. However, these changes did not come to pass. This paper provides an economic analysis of why, using the transaction cost economic framework of Ronald Coase and Oliver Williamson. Non-hierarchical corporate organisation struggled against contracting problems in the presence of possible opportunistic behaviour. Technologies of trust offer an institutional mechanism that acts on the margin of trust, suppressing opportunism. The paper concludes that blockchain technology provides an economic infrastructure for the coordination of economic activity and the possible realisation of the electronic markets hypothesis.
AI snapshot
Written from the paper’s full text.
TL;DR
The paper argues that the electronic markets hypothesis failed to materialize because non-hierarchical organization faced opportunism and trust problems, not merely high communication costs. It concludes that blockchain, by industrializing trust and constraining opportunism, provides economic infrastructure that could enable the hypothesis through V-form organizations.
Key findings
- The original electronic markets hypothesis predicted that information technology would increase the proportion of economic activity coordinated by markets; the paper says this did not come to pass, as networked or virtual organizations struggled with coordination and trust.
- The paper argues Malone, Yates, and Benjamin were “correct, but for the wrong reason”: the electronic markets hypothesis is driven not by lower communication costs per se but by a reduction in the cost of trust. Blockchain acts on the margin of trust by suppressing opportunism, making Williamson’s “Promise” contracting process viable.
- Blockchain is described as an institutional technology that industrializes trust; it enables a “V-form” organization—outsourced, vertically integrated firms tied by a distributed ledger—so managers face a choice to make, buy, or network. Examples given are the Aragon Network (decentralized V-form) and Tradelens by IBM and Maersk (centralized V-form).
- The paper concludes that blockchain offers infrastructure for electronic integration and the possible realization of the electronic markets hypothesis. No quantitative results are reported.
Methods
- Conceptual and theoretical analysis, not empirical. It revisits the electronic markets hypothesis using transaction cost economics (Coase, Williamson), trust and coordination arguments (Hayek, Mises, Malone, Sundararajan, Werbach), and blockchain literature.
- Main analytical device: Williamson’s framework of bounded rationality, opportunism, and asset specificity, with four contracting processes (short term, planning, promise, governance) in Table 1; the paper argues blockchain changes the trust/opportunism margin.
- No data, sample, or statistical analysis are reported.
Limitations
- Stated: the paper notes open questions, including whether centralized V-form organizations such as Tradelens are consistent with the electronic markets hypothesis, and whether antitrust policy designed for a non-digital world is appropriate for the digital economy.
- Stated: private provision of digital infrastructure faces an entrepreneurial challenge of devising profitable business models and a public-policy challenge around antitrust and privacy; Haskel and Westlake’s problems include fast technological change making government investment redundant and infrastructure complementing private capital.
- Evident from text: the argument is conceptual and does not empirically test the proposed causal link between blockchain, trust, and realization of the electronic markets hypothesis.
Model-written summary. Check it against the paper before relying on it.
Integrity signals
Registry
Cites
Statistics
Claims the paper makes
0 of 19 cited sources checked · 0 supported · 0 flagged
- Premisecitation
The predicted change to corporate organization from the electronic markets hypothesis did not come to pass.
“The predicted change to corporate organization did not come to pass.”
Quote in the paperSubstantial claim - Interpretationcitation
Trusted third parties that exist primarily to provide trust to facilitate economic transactions face competition from the blockchain as an institutional technology.
“Those institutions-trusted third parties-that exist primarily for the purpose of providing trust to facilitate economic transactions face competition from the blockchain as an institutional technology (Davidson et al., 2018;Berg et al., 2019).”
Quote in the paperSubstantial claim0 of 2 sources checked - Interpretationreasoning
The electronic markets hypothesis is not driven by a reduction in communication costs per se, but rather by a reduction in the cost of trust.
“The electronic markets hypothesis is not driven by a reduction in communication costs per se, but rather by a reduction in the cost of trust.”
Quote in the paperNot a substantial claim - Interpretationcitation
Proof of work blockchains, such as Bitcoin, convert energy into economically valuable trust.
“Proof of work blockchains, such as Bitcoin, convert energy into economically valuable trust.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Berg et al. (2017, 2019)
Not checked in the free run.
- Interpretationnone given
There is greater usage of market forces within hierarchical structures, which is not quite what the electronic markets hypothesis predicted.
“What we can observe now is that there is greater usage of market forces within hierarchical structures.That is not quite what the electronic market hypothesis predicted.”
Quote in the paperNot a substantial claim
- Premisecitation
Blockchain technology economizes on trust.
“we re-examine the electronic markets hypothesis in the light of blockchain technology-a technology which economizes on trust (Berg et al., 2017(Berg et al., , 2019;;Davidson et al., 2018;Werbach, 2018).”
Quote in the paperSubstantial claim0 of 3 sources checked - Interpretationcitation
Alternative consensus mechanisms convert economic coordination tools like voting or costly signaling into trust.
“Alternative consensus mechanisms convert economic coordination tools like voting or costly signaling (such as staking capital) into trust.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Berg et al. (2017, 2019)
Not checked in the free run.
- Interpretationreasoning
What we have yet to see operate at scale is the electronic integration effect.
“What we have yet to see operate at scale is the electronic integration effect.”
Quote in the paperSubstantial claim - Interpretationreasoning
Blockchains industrialize the trust layer.
“Blockchains industrialize this trust layer.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Berg et al. (2017, 2019)
Not checked in the free run.
- Interpretationreasoning
Cooperation around a shared ledger provides many benefits of consolidation, including trust, without the hierarchy costs of administrative bloat and inefficiency.
“Cooperation around a shared ledger provides many of the benefits of consolidation-trust-without the hierarchy costs of administrative bloat and inefficiency.”
Quote in the paperNot a substantial claim - Interpretationcitation
V-form organizations would consist of fully independent companies operating as one vertically integrated organization using blockchain technology to coordinate and audit what would have been done through the corporate office or market.
“The V-form organization would consist of a group of fully independent companies that effectively operate as one vertically integrated organization using blockchain technology to coordinate and audit what would have been previously done either through the corporate office, or in the market.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Berg et al., 2018
Not checked in the free run.
- May combine two claims. 8
- Classified as probably not a substantial claim. 15
May combine two claims.
InterpretationreasoningBlockchain technology offers an infrastructure for electronic integration, and the realization of the electronic markets hypothesis.
“We can conclude that blockchain technology offers an infrastructure for electronic integration, and the realization of the electronic markets hypothesis.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim.
PremisecitationIn Williamson's analysis, Governance manages bounded rationality and opportunism while dealing with asset specificity.
“In Williamson's analysis, Governance manages bounded rationality and opportunism, while dealing with asset specificity.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Williamson (1985)
Not checked in the free run.
Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing).
InterpretationreasoningThis is the electronic brokerage effect at work.
“This is the electronic brokerage effect at work.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim.
PremisecitationAttempts to develop networked or virtual organizations have faced problems around coordination and trust.
“Attempts to develop networked or virtual organizations have faced problems around coordination and trust (Handy, 1995;Jones and Bowie, 1998;Hughes et al., 2001;Kasper-Fuehrera and Ashkanasy, 2001;Shockley-Zalabak et al., 2001;Crossman and Lee-Kelley, 2004;Rasmussen and Wangel, 2007;Riemer and Klein, 2008).”
Quote in the paperSubstantial claim0 of 3 sources checked- cites Handy, 1995
Not checked in the free run.
- cites Jones and Bowie, 1998
Not checked in the free run.
- cites Hughes et al., 2001 source
Not checked in the free run.
Probably not a substantial claim: may not pass S3 (load-bearing).
PremisecitationWilliamson relaxes the rationality assumption from perfect rationality to bounded rationality.
“He also relaxes the rationality assumption-from perfect rationality to bounded rationality.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Williamson
Not checked in the free run.
Probably not a substantial claim: may not pass S2 (checkable), S4 (based).
Interpretationnone givenThe digital revolution will be driven by the provision of industrialized trust at scale, just as the industrial revolution was driven by industrialized energy at scale.
“In precisely, the same way that the industrial revolution was driven by the provision of industrialized energy, at scale, so the digital revolution will be driven by the provision of industrialized trust, at scale.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim. May combine two claims.
PremisecitationWilliamson operationalizes Coase's insight by imagining a make-or-buy decision, and the determinants of where economic activity takes place are largely transaction costs.
“He operationalizes Coase's insight by imagining a make-or-buy decision.”
- Also stated in: § THE ELECTRONIC MARKETS HYPOTHESIS · plain
“The determinants of where that economic activity takes place are largely transaction costs.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Williamson (1985)
Not checked in the free run.
- Also stated in: § THE ELECTRONIC MARKETS HYPOTHESIS · plain
Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.
PremisecitationHaskel and Westlake describe intangible assets as having four unique properties: costs are sunk, they generate spillover effects, they are scalable, and they have synergies.
“They describe intangible assets as having four unique properties: costs are sunk, intangible assets generate spillover effects, intangible assets are scalable, and intangible assets have synergies.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Haskel and Westlake (2018)
Not checked in the free run.
Classified as probably not a substantial claim.
PremisecitationWilliamson modifies the assumption of self-interest to opportunism: individuals are self-interest seeking with guile.
“Williamson modifies that assumption to being individuals are opportunistic-individuals are self-interest seeking with guile.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Williamson
Not checked in the free run.
Classified as probably not a substantial claim. May combine two claims.
PremisecitationCoase argued that there are costs to using the price system and over some ranges those costs were higher in the market than in a firm, so some economic activity takes place within firms and some within markets.
“Coase's solution to this paradox was to point out that there were costs to using the price system and that over some ranges of economic activity those costs were higher in the market than they were in a firm.Consequently, we would expect to observe some economic activity taking place within firms and other economic activity taking place within markets.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Coase (1937) source
Not checked in the free run.
Classified as probably not a substantial claim.
PremisecitationMalone et al. argue that information technology has dramatically reduced the cost of processing and communication information.
“Malone et al. (1987) make the argument that information technology (computers) have dramatically reduced the cost of processing and communication information.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Malone et al. (1987)
Not checked in the free run.
May combine two claims.
InterpretationreasoningBlockchain technology provides an economic infrastructure for the coordination of economic activity and the possible realization of the electronic markets hypothesis.
“The paper concludes that blockchain technology provides an economic infrastructure for the coordination of economic activity and the possible realization of the electronic markets hypothesis.”
- Also stated in: § INTRODUCTION · plain
“The paper argues that blockchain technology provides an infrastructure which allows for the coordination of economic activity, and hence the realization of the possibilities of the electronic markets hypothesis.”
Quote in the paperSubstantial claim- Also stated in: § INTRODUCTION · plain
Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based).
Interpretationnone givenThe digital layer of infrastructure would consist of hardware, software, and protocols but would largely constitute intangible infrastructure.
“While the digital layer of infrastructure would consist of hardware, software, and protocols it would largely constitute intangible infrastructure.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S4 (based).
Interpretationnone givenV-form organizations would provide a trading infrastructure to a future digital economy.
“These V-form organizations would provide a trading infrastructure to a future digital economy.”
Quote in the paperNot a substantial claimMay combine two claims.
Interpretationnone givenCommunication costs had fallen, but only the electronic communication effect had operated until the early twenty-first century.
“Communication costs had fallen, but we argue that only electronic communication effect had operated until the early twenty first century.”
Quote in the paperNot a substantial claimMay combine two claims.
InterpretationreasoningPromise becomes a viable contracting process in the absence of opportunism, or in a world of greater trust.
“Looking back at Table 1, Promise becomes a viable contracting process in the absence of opportunism-or in the world of greater trust.”
Quote in the paperSubstantial claimProbably not a substantial claim: may not pass S2 (checkable), S4 (based). May combine two claims.
InterpretationreasoningIn a world of industrialized trust, an additional digital blockchain layer of economic infrastructure would both complement and substitute for existing forms of economic infrastructure.
“In a world of industrialized trust, it is easy to imagine an additional digital (blockchain) layer of economic infrastructure that both complements and substitutes for existing forms of economic infrastructure.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S3 (load-bearing), S4 (based).
Interpretationnone givenViable business models began appearing in the late twentieth and early twenty-first century.
“Viable business models began appearing in the late twentieth and early twenty first century.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S3 (load-bearing), S4 (based).
Premisenone givenThe big digital platforms Facebook, Google, and Amazon were founded in that era.
“The big digital platforms that we now observe in the economy-Facebook, Google, Amazon-were founded in that era.”
Quote in the paperNot a substantial claim
The paper relies on this without support.
Private sector provision of digital infrastructure can solve the problems of fast technological change and complementarity with private capital.
“The solution to both these problems is to let (even encourage) the private sector to provide digital infrastructure-i.e., build the V-form organizations.”
Claims other papers make about this one
Each is checked against this paper’s own text: does it say what the citing paper says it does?
DLT enables coordination of economic activity through secure, transparent, decentralized electronic markets and is best known as blockchain.
“It enables the coordination of economic activity through the creation of secure, transparent, and decentralized electronic markets (Berg et al. 2019;Kollmann et al. 2019;Subramanian 2017), and is probably best known under the name of blockchain, which is a specific type of DLT (Kannengiesser et al. 2020;Sunyaev 2020).”
From Trustworthy artificial intelligence (2021) · cites this paper as Berg et al. 2019
Self-check
Percentages, sums and reported differences re-computed from the paper’s own numbers.
Each contradiction between two passages listed here was confirmed by an independent check.
Economic activity is described as occurring in two different sets of places
MinorThe later sentence says both alternatives are within firms, contradicting the earlier distinction between activity within firms and activity within markets.
“What is important for our immediate purposes is that (private) economic activity takes place either within hierarchy (firms) or within firms.”
“Consequently, we would expect to observe some economic activity taking place within firms and other economic activity taking place within markets.”
The citation lists haven’t been fetched yet
References 33 · Cited by 67
Research works printed but not linked: 10
- Bastani, 2018, Fully Automated Luxury Communism: A Manifesto.
- Blockchains industrialise trust BergC. DavidsonS. PottsJ. SSRN Working Paper2017
- Outsourcing vertical integration: distributed ledgers and the V-form organisation BergC. DavidsonS. PottsJ. SSRN Working Paper2018
- Bleecker, 1994, The virtual organization, The Futurist, 28, 2
- Chace, 2016, The Economic Singularity: Artificial Intelligence and the Death of Capitalism
- Daugherty, 2018, Human
- Harris, 2002, Rethinking the virtual organisation, 94
- Hayek, 1945, The use of knowledge in society, Am. Econ. Rev, 35, 519
- Malone, 2003, Is empowerment just a fad? Control, decision making, and IT, 49
- Sundararajan, 2016, The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism
- Authors
- Berg, C., Davidson, S., & Potts, J.
- Affiliations
- RMIT University (AU)
- Corresponding author
- Davidson, Sinclair
- Venue
- Frontiers in Blockchain
- Publisher
- Frontiers Media SA
- Published
- 2019-12-04
- Volume
- 2
- ISSN
- 2624-7852 (ISSN-L)
- OpenAlex
- W2994319845
- Semantic Scholar
- a44088d42fabda0dd8aacc067c4275bb3a97faa6
- Cited by
- 67
- References
- 33
- Citations by year
- 2026: 2 · 2025: 11 · 2024: 6 · 2023: 19 · 2022: 13 · 2021: 12 · 2020: 4
- FWCI
- 8.98
- Type
- journal article
- Language
- en
- Open access
- gold
- doi.org
- Licence
- Locations
- Frontiers in Blockchain (publishedVersion, cc-by)
- RMIT Research Repository (RMIT University Library) (submittedVersion)
- Figshare (submittedVersion, cc-by)
- Funders
- Australian Government
- Commonwealth Scientific and Industrial Research Organisation (DATA61)
- Topics
- Physical Sciences › Computer Science › Information Systems › Blockchain Technology Applications and Security
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic Theory and Institutions
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Law, Economics, and Judicial Systems
- Keywords
- blockchain, transaction cost economics, contracting problems, opportunism, institutional mechanisms, coordination of economic activity
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