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Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin Payment System

53 Pages Posted: 28 Aug 2017 Last revised: 18 Oct 2017

Gur Huberman

Columbia Business School - Finance and Economics

Jacob D. Leshno

Columbia University

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations

Multiple version iconThere are 3 versions of this paper

Date Written: October 14, 2017

Abstract

Owned by nobody and controlled by an almost immutable protocol, the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? What are the implications of changing parameters in the protocol?

A simplified economic model that captures the system's properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system's limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.

Keywords: Bitcoin, blockchain, queueing, two-sided markets, market design, cryptocurrency

JEL Classification: D40, D20, L10, L50

Suggested Citation

Huberman, Gur and Leshno, Jacob D. and Moallemi, Ciamac C., Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin Payment System (October 14, 2017). Columbia Business School Research Paper No. 17-92. Available at SSRN: https://ssrn.com/abstract=3025604

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Jacob Leshno (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Ciamac Moallemi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

HOME PAGE: http://moallemi.com/ciamac

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