The economics of cryptocurrency: Bitcoin and beyond

Abstract

Abstract How well can a cryptocurrency serve as a means of payment? Cryptocurrencies need to overcome double‐spending by costly mining and by delaying settlement. We formalize this insight through an incentive constraint that rules out double‐spending and pins down the welfare costs of a cryptocurrency. We find that it is optimal to use seignorage rather than transaction fees to finance costly mining. In supplementary material, we study an extension with endogenous transaction fees and show quantitatively that the prime cost of Bitcoin arises from mining, but can be reduced substantially by optimally designing the reward system.

Topics & Concepts