The Economic Limits of Bitcoin and the Blockchain

A recent academic paper on the limits inherent in the design of bitcoin. The abstract says it all...

The Economic Limits of Bitcoin and the Blockchain

A recent academic paper on the limits inherent in the design of bitcoin, and several other blockchain designs. The abstract says it all;

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.

The full paper is here

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