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The economics of Bitcoin transaction fees

Author

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  • Nicolas Houy

    () (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

Abstract

We study the economics of Bitcoin transaction fees in a simple static partial equilibrium model with the specificity that the system security is directly linked to the total computational power of miners. We show that any situation with a fixed fee is equivalent to another situation with a limited block size. In both cases, we give the optimal value of the transaction fee or of the block size. We also show that making the block size a non binding constraint and, in the same time, letting the fee be fixed as the outcome of a decentralized competitive market cannot guarantee the very existence of Bitcoin in the long-term.

Suggested Citation

  • Nicolas Houy, 2014. "The economics of Bitcoin transaction fees," Working Papers 1407, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:1407
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    File URL: ftp://ftp.gate.cnrs.fr/RePEc/2014/1407.pdf
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    References listed on IDEAS

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    1. Fumiko Hayashi & William R. Keeton, 2012. "Measuring the costs of retail payment methods," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
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    Cited by:

    1. Pavel Ciaian & Miroslava Rajcaniova & d’Artis Kancs, 2016. "The digital agenda of virtual currencies: Can BitCoin become a global currency?," Information Systems and e-Business Management, Springer, vol. 14(4), pages 883-919, November.

    More about this item

    Keywords

    Bitcoin; transaction fee; mining; crypto-currency;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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