Blockchain as a Nash equilibrium

Every Bitcoin transaction needs to be verified on the blockchain. There is no central authority that does this, but Bitcoin's blockchain has run uninterrupted since 2009 and now carries a market capitalisation of $1.3 trillion, roughly 4% of US GDP. Its original promise was more radical: that we do not need a trusted intermediary to spend money, write contracts, or create finance. In the fifth LTI report, published today, Yackolley Amoussou-Guenou, Bruno Biais, and Sara Tucci-Piergiovanni ask how much of that promise has held. 

Bruno talks to Tim Phillips about blockchain’s potential, its flaws, and its future.  

It is a Nash equilibrium: if you believe others will follow the rules, it is in your interest to follow them too. On that foundation Bitcoin’s ledger has been running continuously for 16 years. Smart contracts, pioneered by Vitalik Buterin's Ethereum, extend the logic to financial agreements. Decentralised finance promised to cut out rent-seeking intermediaries. Cryptocurrencies can step in where banks are broken or currencies have collapsed; in Lebanon, when bank accounts were frozen and payments stopped, businesses switched to crypto and kept operating. 

But the technology's libertarian origins may need to be sacrificed: As Bruno says, without transparency there is no trust, and transparency in this market may require regulation.

The research behind this episode:

Amoussou-Guenou, Yackolley, Bruno Biais, and Sara Tucci-Piergiovanni. 2026. "Can Blockchain Decentralize Money, Contracts, and Finance?" LTI Report 5. CEPR and Long-Term Investors@UniTo. Freely available to download at cepr.org. 

To cite this episode:

Phillips, Tim, and Bruno Biais. 2025. "Can Blockchain Decentralize Money, Contracts, and Finance?" VoxTalks Economics (podcast). 

Assign this as extra listening. The citation above is formatted and ready for a reading list or VLE.

About the guest

Bruno Biais is Professor of Finance at HEC Paris and a Research Fellow at the Centre for Economic Policy Research (CEPR). His research spanning financial market microstructure, corporate finance, and the economics of blockchain has made him one of the leading economists working at the intersection of finance and decentralised technology. He has studied blockchain and cryptocurrency markets since their early years, and his theoretical models of consensus mechanisms and cryptocurrency valuation have shaped how economists understand the conditions under which decentralised systems can and cannot sustain themselves.

Research cited in this episode

The blockchain is a distributed ledger maintained by a network of nodes, each holding an identical copy of the record of ownership. When a transaction is submitted, all nodes verify it against the existing ledger and update their copies to reach consensus on the new state. No central authority manages this process; its stability rests entirely on the incentive structure built into the protocol.

Nash equilibrium is a concept from game theory, named for the mathematician John Nash, describing a situation in which each participant's strategy is the best response to the strategies of all others; no individual has an incentive to deviate unilaterally. Biais and co-authors identify the Bitcoin protocol as a Nash equilibrium: if you believe others will follow the rules, it is in your own interest to follow them too. That self-reinforcing alignment of incentives, rather than goodwill or central enforcement, is why the blockchain has remained valid since 2009.

Smart contracts are lines of code deposited on a blockchain that execute automatically when specified conditions are met: if X, then Y. Vitalik Buterin introduced them through the Ethereum platform, which offers a richer programming language than Bitcoin and allows users to hold collateral on-chain to guarantee the contract will pay out. Smart contracts underpin automated market makers, decentralised lending, and a wide range of financial applications that require no counterparty or intermediary to enforce the agreement.

Oracles are third-party services that transmit data about real-world events to a blockchain, allowing smart contracts to respond to things that happen off-chain. A contract that pays out when a house burns, for example, requires an oracle to report that event to the network. Oracles introduce a point of fragility: the authenticity and accuracy of off-chain information must be established before the network accepts it, and that verification is more vulnerable to error and manipulation than the on-chain consensus mechanism itself.

Front-running and miner extractable value (MEV) describe the practice by which technically sophisticated actors exploit the public visibility of pending transactions to extract profits at the expense of ordinary users. Because transactions on public blockchains are broadcast to all nodes before they are confirmed, an actor who sees a large pending purchase can execute the same trade first, drive the price up, and then sell at a profit once the original transaction goes through. The cost falls on the smaller trader. Biais notes that the barriers to entry and economies of scale in this activity have concentrated power in the hands of a small, technically skilled group, recreating the kind of intermediary rents that decentralised finance was designed to eliminate.

Automated market makers are smart contracts that provide continuous liquidity for trading between two assets by holding reserves of both in a pool and setting prices according to the ratio of the reserves. A large purchase of one asset depletes that side of the pool and raises its price; a large sale depresses it. Automated market makers have become a central mechanism of decentralised finance, replacing the order-book systems used in traditional exchanges.

Stablecoins are cryptocurrency tokens designed to maintain a fixed value relative to a conventional currency, typically the US dollar. They are issued by private entities that hold reserves intended to back the peg. Tether, the largest stablecoin by market capitalisation, holds its reserves in a mix of Treasury bills, Bitcoin, and precious metals; in 2021, the US Commodity Futures Trading Commission fined Tether for misrepresenting those reserves and required it to disclose their composition, making this information publicly available for the first time. Dai is an algorithmically managed stablecoin that maintains its peg through over-collateralisation in cryptocurrency rather than conventional reserves.

The Diamond-Dybvig model is a theoretical framework developed by Douglas Diamond and Philip Dybvig explaining why financial intermediaries that hold illiquid assets while issuing liquid claims are inherently vulnerable to runs. When enough depositors demand withdrawal simultaneously, the institution is forced to sell assets at a loss, making further withdrawals impossible and confirming the fears that triggered the run. Biais applies this logic to stablecoins: if enough holders attempt to redeem simultaneously, the issuer must sell its reserves in volume, driving down their price and potentially breaking the peg.

Central bank digital currencies (CBDCs) are digital tokens issued and managed by central banks, distinct from both commercial bank deposits and private stablecoins. Biais distinguishes two potential use cases: retail CBDCs, which would allow individuals to hold central bank money directly, and wholesale CBDCs, which would facilitate settlement between large financial institutions. He regards the wholesale application as the more promising; a wholesale CBDC could enable fast, low-cost atomic settlement of cross-currency transactions between banks under central bank oversight, a significant improvement on current interbank settlement systems.

MiCA (Markets in Crypto-Assets Regulation) is the European Union's regulatory framework for crypto-asset service providers, which came fully into force in December 2024. It requires licensing for issuers and service providers operating within the EU and imposes disclosure, reserve, and conduct requirements intended to align the sector more closely with the standards applied in traditional financial markets.

Hayek's currency competition refers to the argument by Friedrich Hayek that competition between privately issued currencies would discipline monetary policy: users would switch away from currencies managed irresponsibly, and that threat would encourage better central bank behaviour. Biais applies this argument to cryptocurrencies and stablecoins in countries where the domestic currency has been mismanaged. He cites Nigeria, where sharp depreciation of the naira was accompanied by rising crypto adoption; over the following period, Nigeria's central bank raised interest rates and created a more transparent foreign exchange market. Biais suggests, tentatively, that the competitive pressure from crypto alternatives may have contributed to that improvement.

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