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Scaling Smart Contracts Via Layer-2 Technologies

[Lecture Series Spring’23]


Blockchain-based smart contracts can potentially replace certain traditional contracts through decentralized enforcement and reduced transaction costs. However, scalability is a key bottleneck hindering their broader application and adoption, often leading to concentrated or exclusive networks. To avoid falling short of the original promise of the technology, firms actively explore “layer-2” methods for scaling. We provide some initial evidence on the economic implications of a layer-2 scaling solution, which moves information aggregation from on-chain to off-chain peer-to-peer networks. A parallel-system experiment allows clean identification because we observe the same unit in the treatment and control systems at the same time. We find that this scaling solution reduces operating costs by 76%, and importantly, leads to decentralization with lower market concentration and more participation, which in turn improves data accuracy. The findings provide initial evidence of how blockchain and smart contracting technologies evolve towards achieving decentralized and scalable trust.

Recommended reading materials:

  1. Cong, L. W., Hui, X., Tucker, C., & Zhou, L. (2023). Scaling Smart Contracts via Layer-2 Technologies: Some Empirical Evidence (No. w30912). National Bureau of Economic Research.


Prof. Catherine Tucker

Prof. Catherine Tucker is the Sloan Distinguished Professor of Management and a Professor of Marketing at MIT Sloan. She is the faculty director of the EMBA program. She has also been the Chair of the MIT Sloan PhD Program.
Her research interests lie in how technology allows firms to use digital data and machine learning to improve performance, and in the challenges this poses for regulation. Tucker has particular expertise in online advertising, digital health, social media, and electronic privacy. Her research studies the interface between marketing, the economics of technology, and law.
She has received an NSF CAREER Award for her work on digital privacy, the Erin Anderson Award for an Emerging Female Marketing Scholar and Mentor, the Garfield Economic Impact Award for her work on electronic medical records, the Paul E. Green Award for contributions to the practice of Marketing Research, the William F. O’Dell Award for most significant, long-term contribution to Marketing, and the INFORMS Society for Marketing Science Long Term Impact Award for long-run impact on marketing.
She is a co-founder of the MIT Cryptoeconomics Lab which studies the applications of blockchain. She has been a Visiting Fellow at All Souls College, Oxford. She has testified to Congress regarding her work on digital privacy and algorithms, and presented her research to the OECD, World Bank, IMF and the ECJ.