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Blockchain Economics

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Abstract

The fundamental problem in digital record-keeping is establishing consensus on an update to a ledger, e.g., a payment. Consensus must be achieved in the presence of faults—situations in which some computers are offline or fail to function appropriately. Traditional centralized record-keeping systems rely on trust in a single entity to achieve consensus. Blockchains decentralize record-keeping, dispensing with the need for trust in a single entity, but some instead build a consensus based on the wasteful expenditure of computational resources (proof-of-work). An ideal method of consensus would be tolerant to faults, avoid the waste of computational resources, and be capable of implementing all individually rational transfers of value among agents. We prove a Blockchain Trilemma: any method of consensus, be it centralized or decentralized, must give up (i) fault-tolerance, (ii) resource-efficiency, or (iii) full transferability.

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  • Joseph Abadi & Markus K. Brunnermeier, 2022. "Blockchain Economics," Working Papers 22-15, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:94148
    DOI: 10.21799/frbp.wp.2022.15
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    More about this item

    Keywords

    Blockchain; Consensus; Cryptocurrency; Mechanism Design; Payments; FinTech;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G00 - Financial Economics - - General - - - General

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