The Economic Limits of Bitcoin and the Blockchain

Eric Budish

No 24717, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin's must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system's vulnerability to a “majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.

JEL-codes: A1 D00 D47 D53 E4 E42 G1 G12 G2 G4 L99 Z39 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-mac, nep-pay and nep-rmg
Note: AP CF IO ME PR
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