Economics at your fingertips  

The Economics of Cryptocurrencies—Bitcoin and Beyond

Jonathan Chiu and Thorsten Koeppl ()

Staff Working Papers from Bank of Canada

Abstract: A cryptocurrency system such as Bitcoin relies on a decentralized network of anonymous validators to maintain and update copies of the ledger in a process called mining. In such a permissionless system, someone can cheat by spending a coin twice, which leads to the so-called double-spending problem. A well-functioning cryptocurrency system must ensure that users do not have an incentive to double spend. We develop a general-equilibrium model of a cryptocurrency. We use the model to obtain a condition that rules out double spending and study the optimal design of cryptocurrencies. We also quantify the welfare costs of using a cryptocurrency as a payment instrument. We find that it is better to use the revenue from currency creation rather than transaction fees to finance the costly mining process. We estimate that Bitcoin generates a large welfare loss that is about 500 times bigger than the welfare loss in a monetary economy with 2 percent inflation. This welfare loss can be lowered in an optimal design to the equivalent of that in a monetary economy with moderate inflation of about 45 percent.

Keywords: Digital Currencies and Fintech; Monetary Policy; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: E4 E5 L5 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link) Full text (application/pdf)

Related works:
Working Paper: The Economics of Cryptocurrencies -- Bitcoin and Beyond (2019) Downloads
Working Paper: The Economics Of Cryptocurrencies - Bitcoin And Beyond (2017) Downloads
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:

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

Page updated 2023-03-16
Handle: RePEc:bca:bocawp:19-40