Bitcoin’s limited adoption problem

Franz J. Hinzen, Kose John and Fahad Saleh

Journal of Financial Economics, 2022, vol. 144, issue 2, 347-369

Abstract: We demonstrate theoretically that Bitcoin’s limited adoption arises as an equilibrium outcome rather than as a short-lived property. Our results are driven by negative network effects which arise due to Bitcoin’s need for consensus and the existence of network delay. As the Bitcoin network expands, network delay grows thereby prolonging the time needed for generating consensus. In turn, transaction settlement becomes prolonged, and users abandon the system, yielding limited adoption. Increasing transaction rates fails to solve this problem because increasing transaction rates increases fork probabilities which prolongs the consensus process and generates limited adoption.

Keywords: Bitcoin; Limited adoption; Consensus; Network delay; Blockchain; Fintech (search for similar items in EconPapers)
JEL-codes: E42 G00 G29 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:2:p:347-369

DOI: 10.1016/j.jfineco.2022.01.003

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