The Economics Of Cryptocurrencies - Bitcoin And Beyond

Jonathan Chiu and Thorsten Koeppl

No 1389, Working Paper from Economics Department, Queen's University

Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.

Keywords: Cryptocurrency; Blockchain; Bitcoin; Double Spending; Payment Systems (search for similar items in EconPapers)
JEL-codes: E4 E5 L5 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2017-09
New Economics Papers: this item is included in nep-cta, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (77)

Downloads: (external link)
https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1389.pdf First version 2017 (application/pdf)

Related works:
Working Paper: The Economics of Cryptocurrencies—Bitcoin and Beyond (2019)
Working Paper: The Economics of Cryptocurrencies -- Bitcoin and Beyond (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1389

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