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Monopoly without a monopolist : An economic analysis of the bitcoin payment system

Author

Listed:
  • Huberman, Gur
  • Leshno, Jacob D.
  • Moallemi, Ciamac

Abstract

Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? What are the implications of changing parameters in the protocol? A simplified economic model that captures the system's properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system's limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.

Suggested Citation

  • Huberman, Gur & Leshno, Jacob D. & Moallemi, Ciamac, 2017. "Monopoly without a monopolist : An economic analysis of the bitcoin payment system," Research Discussion Papers 27/2017, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2017_027
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    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/14912/1/BoF_DP_1727.pdf
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    References listed on IDEAS

    as
    1. Joshua S. Gans & Hanna Halaburda, 2015. "Some Economics of Private Digital Currency," NBER Chapters,in: Economic Analysis of the Digital Economy, pages 257-276 National Bureau of Economic Research, Inc.
    2. Christian Catalini & Joshua S. Gans, 2016. "Some Simple Economics of the Blockchain," NBER Working Papers 22952, National Bureau of Economic Research, Inc.
    3. Neil Gandal & Hanna Halaburda, 2014. "Competition in the Cryptocurrency Market," Working Papers 14-17, NET Institute.
    4. David Yermack, 2013. "Is Bitcoin a Real Currency? An economic appraisal," NBER Working Papers 19747, National Bureau of Economic Research, Inc.
    5. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-781, August.
    6. Chiu, Jonathan & Koeppl, Thorsten V, 2017. "The economics of cryptocurrencies – bitcoin and beyond," Working Paper Series 6688, Victoria University of Wellington, School of Economics and Finance.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jonathan Chiu & Thorsten Koeppl, 2018. "Blockchain-Based Settlement for Asset Trading," Staff Working Papers 18-45, Bank of Canada.
    2. Abadi, Joseph & Brunnermeier, Markus K, 2018. "Blockchain Economics," CEPR Discussion Papers 13420, C.E.P.R. Discussion Papers.
    3. repec:eee:reecon:v:72:y:2018:i:2:p:171-180 is not listed on IDEAS
    4. Frame, W. Scott & Wall, Larry D. & White, Lawrence J., 2018. "Technological Change and Financial Innovation in Banking: Some Implications for Fintech," FRB Atlanta Working Paper 2018-11, Federal Reserve Bank of Atlanta.
    5. repec:bis:bisqtr:1809f is not listed on IDEAS
    6. Daniel Ferreira & Jin Li & Radoslawa Nikolowa, 2019. "Corporate Capture of Blockchain Governance," Working Papers 880, Queen Mary University of London, School of Economics and Finance.
    7. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro, 2018. "Between Cash, Deposit And Bitcoin: Would We Like A Central Bank Digital Currency? Money Demand And Experimental Economics," BAFFI CAREFIN Working Papers 1875, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. Auer, Raphael, 2019. "Beyond the doomsday economics of "proof-of-work" in cryptocurrencies," CEPR Discussion Papers 13506, C.E.P.R. Discussion Papers.
    9. Hosain, Md Sajjad, 2018. "Bitcoin: Future transaction currency?," MPRA Paper 87588, University Library of Munich, Germany.
    10. Lin William Cong & Zhiguo He, 2018. "Blockchain Disruption and Smart Contracts," NBER Working Papers 24399, National Bureau of Economic Research, Inc.
    11. Canidio, Andrea, 2018. "Financial incentives for open source development: the case of Blockchain," MPRA Paper 85352, University Library of Munich, Germany.
    12. repec:fru:finjrn:180510:p:120-129 is not listed on IDEAS

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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