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The Economics of Cryptocurrencies -- Bitcoin and Beyond

Jonathan Chiu ()

No 425, 2019 Meeting Papers from Society for Economic Dynamics

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.

Date: 2019
New Economics Papers: this item is included in nep-mon and nep-pay
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https://economicdynamics.org/meetpapers/2019/paper_425.pdf (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
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:425

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