Cryptocurrencies: The Network vs. The Chain

Samuel Fahim

No 101, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: This paper studies whether fast-settlement payment layers can replace secure baselayer blockchains in a search-theoretic monetary model. The Chain provides secure but costly and probabilistic settlement, while the Network provides instant, cost-free payments but exposes users to cyberattacks and requires sellers to incur adoption costs. In the Chain-only benchmark, buyers choose settlement intensity after bargaining. Because they do not internalize the full trade surplus, settlement intensity is inefficiently low, reducing trade efficiency and weakening the monetary value of tokens. Introducing the Network generates multiple payment equilibria. Under exogenous cyberattack risk, Chain and Network payments may coexist: the Network provides fast settlement and fallback liquidity when Chain settlement fails, while the Chain remains valuable for its security and universal acceptance. If cyberattack risk is sufficiently low, pure Network payments can arise, although pure Chain payments may also persist because Network acceptance is costly for sellers. When cyberattack risk is endogenous, broader Network adoption increases exposed balances and strengthens hackers’ incentives. This security externality weakens the Network’s value as fallback liquidity and eliminates the pure Network-payment equilibrium. The Chain, therefore, survives as a secure settlement anchor. The welfare analysis shows that Network adoption is not always welfare improving: its payment-efficiency gains must outweigh seller adoption costs and, under endogenous attacks, the resource costs of hacking. Fast-settlement layers can improve payment efficiency, but they do not generically replace secure base-layer settlement.

Keywords: Cryptocurrency payments; Blockchain settlement; Layer-2 payment networks; cyberattack risk; Payment-layer competition; New Monetarist literature; Search-theoretic monetary model. (search for similar items in EconPapers)
JEL-codes: C78 D62 D83 E40 E42 O33 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2026-07-02
New Economics Papers: this item is included in nep-mon and nep-pay
References: Add references at CitEc
Citations:

Downloads: (external link)
https://opus4.kobv.de/opus4-hsog/files/6287/BSoE_DP_0101.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0101

DOI: 10.48462/opus4-6287

Access Statistics for this paper

More papers in Berlin School of Economics Discussion Papers from Berlin School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Reiter ().