From mining to markets: The evolution of bitcoin transaction fees

Easley, David; O’Hara, Maureen; Basu, Soumya

doi:10.1016/j.jfineco.2019.03.004

Cited by 464 publications

(181 citation statements)

References 3 publications

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“…Finally, some work tries to understand the relationship between mining and fees. Huberman et al (2017) and Easley et al (2019) both study the willingness of users in Bitcoin to post fees that support costly mining. The key channel here is that Bitcoin offers limited throughput that makes fast settlement a scarce resource.…”

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confidence: 99%

The Economics of Cryptocurrencies Bitcoin and Beyond

2017

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How well can a cryptocurrency serve as a means of payment? Cryptocurrencies need to overcome double spending by using 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. We estimate that Bitcoin generates a large welfare loss that is about 500 times as large as a monetary economy with 2% inflation. This welfare loss can be lowered in an optimal design to the equivalent of a monetary economy with moderate inflation of about 45%. Bank topics: Digital currencies and fintech; Monetary policy; Payment clearing and settlement systems JEL codes: E4, E5, L5How well can a cryptocurrency serve as a means of payment? Since the creation of Bitcoin in 2009, many critics have denounced cryptocurrencies as fraud or outright bubbles. Others have argued that such currencies are only there to support payments for illegal activities or simply waste resources. Advocates point out, however, that -based on cryptographic principles to ensure security -these new currencies can support payments without the need to designate a third party that controls the currency or payment instrument, possibly for its own profit. 1We take up this discussion and develop a general equilibrium model of a cryptocurrency that uses a blockchain as a record-keeping device for payments. Many existing models of cryptocurrencies are built by computer scientists who focus mainly on the feasibility and security of these systems.Crucial issues, such as the incentives of participants to cheat, and the endogenous nature of some key variables, such as the real value of a cryptocurrency in exchange, have been largely ignored.Such considerations, however, are pivotal for understanding the optimal design and, hence, the economic value of cryptocurrency as a means of payment.Our focus is thus primarily on understanding how the design of a cryptocurrency influences the interactions among participants and their incentives to cheat. These incentives arise from a so-called double-spending problem. Cryptocurrencies are based on digital records that can be duplicated easily and costlessly and, thus, that can potentially be used multiple times in transactions.Our first contribution is to formalize this double-spending problem and show how it is addressed by (i) a resource-intensive competition for updating the records of transactions -a process commonly referred to as mining; and (ii) by introducing confirmation lags for settling transactions. 2 Double spending with a cryptocurrency requires one to change the record of transactions after the transactions have been recorded and confirmed in the blockchain. Since a blockchain builds records based on previous records, to revoke past transactions, one must create an alternative history of transaction records in order to double spend successfully. More intensive competition to update the chain and longer c...

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confidence: 99%

The Economics of Cryptocurrencies Bitcoin and Beyond

2017

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“…Наш анализ показывает, что криптовалюты можно использовать как платежное средство, но они не могут служить надежной расчетной денежной единицей и средством сбережения. Помимо фундаментальной проблемы доверия к криптовалютам, не являющимся обязательствами кого-либо, и неэластичности или недостаточной гибкости предложения ряда криптовалют, выделяются и другие ограничения криптовалютных платежных систем [12][13][14].…”

Section: конкуренция криптовалют и платежных системunclassified

The Essence of Cryptocurrencies: Descriptive and Comparative Analysis

Sinelnikova-Muryleva¹,

Shilov²,

Zubarev³

2019

jour

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The aim of the article is to systematize the views on the concept of cryptocurrency from the literature and among international and national organizations and regulators, to analyze its economic essence and the place in the modern monetary and financial system. The definition and the functions of cryptocurrency are discussed in the framework of descriptive and theoretical analysis. The paper systematized the existing approaches to the concept analysis of cryptocurrency; the place of cryptocurrency in modern economic theory is shown.The article concludes that cryptocurrencies are often determined through the set of basic characteristics. Cryptocurrencies are not money, though they can perform the main function of money — to be a means of payment; they can be a means of making settlements, assets, platforms for concluding smart contracts, a means for crowdfunding. They are not private money in Hayek’s interpretation. Cryptocurrencies can be described in the framework of the models of new monetarism (payment economics).

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“…Some cryptoeconomics models are dynamic, meaning that on-chain concentration is a function of the incentives to enter (access) a blockchain system, others are static, in the sense that the competitive dynamics occurring on-chain only depend on a fixed number of actors operating over the blockchain. A non-comprehensive list of the works belonging to this stream is represented by: Abadi and Brunnermeier (2018), Biais et al (2019), Bonneau (2018, Bohme et al (2015), Budish (2018); Chiu and Koeppl (2017), Cong and He (2019), Easley et al (2019), Huberman et al (2017), Kroll et al (2013), Ma et al (2018). Narayanan and colleagues (2016: 130-136 & 190-206) provide an exhaustive overview of the economic and technological problems linked to the incentives embedded in any crypto consensus algorithm.…”

Section: Market-power: Network As An Egalitarian Distribution Of Capitalmentioning

confidence: 99%

Towards a Theory of Digital Network De/centralization: Platform-Infrastructure Lessons Drawn from Blockchain

Rossi

Sørensen

2019

SSRN Journal

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Global digital platforms are conquering the world and rely critically on digital infrastructures to function, yet little research has explored the fundamental interrelationship between the two. This working paper argues that understanding centralization and decentralization in digital networks as asymmetry and symmetry in mutual interdependencies between the constitutive elements of a digital network can help us understand the platform-infrastructure relationship more fundamentally (and vice versa). To this end, the paper proposes, as a starting point, the in-depth analytical and literature study of blockchain networks as a particularly revealing type of digital platform/infrastructure duality. The paper proposes an analytical model for characterizing de/centralization in digital networks and maps this onto blockchain networks. Based on this, the paper explores the de/centralization of blockchain, arguing that the extant blockchain literature largely has failed in providing a comprehensive understanding of de/centralization by not considering the complex second-order interdependencies between the different constitutive dimensions of a blockchain: the symbolic, technological and political dimension. Based on this, the paper provides an analysis of the meaning of de/centralization in blockchain networks by studying the interdependencies between its constitutive elements of coin, network technology, and social community.

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From mining to markets: The evolution of bitcoin transaction fees

Cited by 464 publications

References 3 publications

The Economics of Cryptocurrencies Bitcoin and Beyond

The Economics of Cryptocurrencies Bitcoin and Beyond

The Essence of Cryptocurrencies: Descriptive and Comparative Analysis

Towards a Theory of Digital Network De/centralization: Platform-Infrastructure Lessons Drawn from Blockchain

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