Economic Aspects of Bitcoin and Other Decentralized Public-Ledger Currency Platforms

Abstract

A number of internet-based digital currency platform based on decentralized public ledgers have started since the introduction of the blockchain concept by the founder of Bitcoin in 2008. An important element of these public ledger platforms is an incentive system that elicits efforts from a distributed global workforce to verify and record transactions on the public ledger and a governance system for the platform. The economic efficiency and possibly viability of a public ledger platform ultimately depend on the design of these incentive and governance systems. Even if a decentralized public ledger were a more efficient technology for conducting financial transactions, and for providing a platform for distributed innovation, deficiencies in its incentive and governance systems could make it overall inferior to alternatives, including existing systems. Current claims that public ledger platforms can conduct financial transactions more efficiently ignore the inefficiencies associated with the incentive and governance systems and the likely costs associated with regulation of these platforms and complementary service providers such as vaults, wallets, and exchanges. It is possible that public ledger platforms are more efficient than other alternative platforms for conducing financial transactions, but as of now the proposition is based on apples-to-oranges comparisons compounded with speculation. Competition will lead to better incentive and governance systems for public ledger platforms.

Keywords: bitcoin, public ledger, blockchain, digital currency, alt currency, electronic money, economics of bitcoin, cash alternatives, electronic money

JEL Classification: E40, E41, E42, E44, E51, E58, F24, F31, F33, G21, G38, K23, L14, L17, L21, L33, P4, J33, J46