IDEAS home Printed from
   My bibliography  Save this paper

The Economic Limits of Bitcoin and the Blockchain


  • Eric Budish


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.

Suggested Citation

  • Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24717
    Note: AP CF IO ME PR

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Donato Masciandaro, 2018. "Central Bank Digital Cash and Cryptocurrencies: Insights from a New Baumol–Friedman Demand for Money," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 540-550, December.
    2. Assimakis Kattis & Fabian Trottner, 2020. "Stabilizing Congestion in Decentralized Record-Keepers," Papers 2005.06093,
    3. Zimmerman, Peter, 2020. "Blockchain structure and cryptocurrency prices," Bank of England working papers 855, Bank of England.
    4. Raphael Auer, 2019. "Embedded supervision: how to build regulation into blockchain finance," BIS Working Papers 811, Bank for International Settlements.
    5. Dhillon, Amrita & Kotsialou, Grammateia & McBurney, Peter & Riley, Luke, 2020. "Voting over a Distributed Ledger: An interdisciplinary perspective," SocArXiv 34df5, Center for Open Science.
    6. Lin William Cong & Zhiguo He & Jiasun Li, 2019. "Decentralized Mining in Centralized Pools," NBER Working Papers 25592, National Bureau of Economic Research, Inc.
    7. Hitoshi Matsushima, 2019. "Blockchain Disables Real-World Governance," KIER Working Papers 1017, Kyoto University, Institute of Economic Research.
    8. W. Scott Frame & Larry D. Wall & Lawrence J. White, 2018. "Technological Change and Financial Innovation in Banking: Some Implications for Fintech," FRB Atlanta Working Paper 2018-11, Federal Reserve Bank of Atlanta.
    9. He Huang, 2019. "How Does Information Transmission Influence the Value Creation Capability of a Digital Ecosystem? An Empirical Study of the Crypto-Digital Ecosystem Ethereum," Sustainability, MDPI, Open Access Journal, vol. 11(19), pages 1-16, September.
    10. 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.
    11. Raphael Auer, 2019. "Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies," Globalization Institute Working Papers 355, Federal Reserve Bank of Dallas, revised 01 Feb 2019.
    12. Gandal, Neil & Gans, Joshua & Haeringer, Guillaume & Halaburda, Hanna, 2020. "The Microeconomics of Cryptocurrencies," CEPR Discussion Papers 14972, C.E.P.R. Discussion Papers.
    13. Dhillon, Amrita & Kotsialou, Grammateia & McBurney, Peter & Riley, Luke, 2019. "Introduction to Voting and the Blockchain: some open questions for economists," CAGE Online Working Paper Series 416, Competitive Advantage in the Global Economy (CAGE).
    14. Cukierman, Alex, 2019. "Welfare and Political Economy Aspects of a Central Bank Digital Currency," CEPR Discussion Papers 13728, C.E.P.R. Discussion Papers.
    15. Rod Garratt & Maarten van Oordt, 2020. "Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies," Staff Working Papers 20-27, Bank of Canada.
    16. Carlo Gola & Andrea Caponera, 2019. "Policy issues on crypto-assets," LIUC Papers in Economics 2019-7, Cattaneo University (LIUC).
    17. Jurgen E. Schatzmann & Bernhard Haslhofer, 2020. "Bitcoin Trading is Irrational! An Analysis of the Disposition Effect in Bitcoin," Papers 2010.12415,
    18. De Pace, Pierangelo & Rao, Jayant, 2020. "Comovement and Instability in Cryptocurrency Markets," Economics Department, Working Paper Series 1012, Economics Department, Pomona College, revised 14 Jan 2020.

    More about this item

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • D00 - Microeconomics - - General - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services
    • G4 - Financial Economics - - Behavioral Finance
    • L99 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Other
    • Z39 - Other Special Topics - - Tourism Economics - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:24717. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.