Blockchain Congestion Facilitates Currency Competition

Maxi Guennewig ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Blockchain capacity constraints induce congestion when many users want to transact at the same time, challenging the usability of cryptocurrencies as money. This paper argues that blockchain capacity constraints, coupled with the need to incentivize miners (validators) to maintain blockchain security, lead to low inflation outcomes when cryptocurrencies compete for user demand. If two coins are both used as medium of exchange, a low-inflation coin must experience higher congestion than a high-inflation coin; otherwise demand for the latter is zero. Coin issuers then strategically undercut each other’s money growth rates to boost transaction demand, limiting the overall inflation rate of the economy. However, the equilibrium is necessarily inefficient given unrealized gains from trade due to congestion and the cost of maintaining blockchain security.

Keywords: Cryptocurrencies; currency competition; blockchain; inflation (search for similar items in EconPapers)
JEL-codes: E40 E42 E5 (search for similar items in EconPapers)
Pages: 45
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2024_549

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