Abstract: Money is a coordination device underpinned by strong network effects: the more others accept a form of money, the more I wish to adopt it too. The decentralisation agenda of public permissionless blockchains undercuts these network effects and leads to fragmentation of the monetary landscape. Validators who maintain the blockchain need to be rewarded to play their role with the necessary reward increasing in the degree of dependence on other validators’ actions to sustain consensus. Since these rewards must ultimately be borne by users through congestion rents, capacity constraints are a feature, not a bug, especially for blockchains with more stringent standards for consensus. New blockchains with less stringent thresholds for consensus enter the market to serve users priced out of incumbent chains. The resulting fragmentation undercuts the very network effects that give money its social value. Stablecoins inherit this fragmentation from the blockchains on which they reside. The analysis has broader implications for the future of the monetary system.
