The economics of cryptocurrencies – bitcoin and beyond

Jonathan Chiu and Thorsten V Koeppl

No 20278, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

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)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://ir.wgtn.ac.nz/handle/123456789/20278

Related works:
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: https://EconPapers.repec.org/RePEc:vuw:vuwecf:20278

Access Statistics for this paper

More papers in Working Paper Series from Victoria University of Wellington, School of Economics and Finance Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Library Technology Services (library-research@vuw.ac.nz).