Can you trust the Blockchain? The (limited) Power of Peer-to-Peer Networks for Information Provision

We investigate the potentials and limits of privacy-preserving blockchain technology for the generation of information. In our model, heterogeneous firms can rely on traditional institutions or adopt a blockchain to inform the capital market. The blockchain leverages its peer-to-peer structure and disseminates aggregate information while ensuring the privacy of individual data entries. Within this system, firm-specific information provision depends on two critical factors: (i) the blockchain's fit for analyzing a given firm's data, and (ii) its reach into the economy as provided by the proportion of firms adopting the blockchain in equilibrium. The technology can improve information provision in two ways. The adoption decision itself may serve as a credible signal of a firm's valuation, and the blockchain may generate more information than traditional institutions when its reach is sufficiently high. However, we characterize an equilibrium in which high-value and low-value firms are present both inside and outside the blockchain, which limits both channels' ability to generate information. We show that the information provision can even fall below the benchmark case in which blockchain technology is not available.