Blockchain Adoption and Optimal Reinsurance Design

Abstract

We consider blockchain adoption in a multiple firm market. The blockchain cost per firm decreases with the adoption rate as the cost of verification and recording is distributed among the adopters. We study the Nash equilibria of the adoption game and derive results on existence and uniqueness in terms of the cost structure. We characterize the gap between the social optimum and the Nash equilibrium for different blockchain cost structures, e.g. exponential, linear and quadratic. We next set up a model for blockchain adoption by insurance firms in the presence of a reinsurer. We integrate the insurance specific contractual characteristics such as premiums and indemnities, and we account for the utility function of the parties. For exponential utility, we show that the problem reduces to a generic blockchain adoption problem, with modified cost structure, which is found in closed form depending on all the contractual characteristics and the risk aversion coefficients. When the reinsurance firm acts as a social planner, the co-insurance premiums are optimally chosen depending on the insurers' adoption decision. This serves as a mechanism to select an outcome with higher adoption rate.