An Economic Analysis of the Bitcoin Payment System

60 Pages Posted: 28 Aug 2017 Last revised: 15 Nov 2018

See all articles by Gur Huberman

Gur Huberman

Columbia Business School - Finance and Economics

Jacob Leshno

Chicago Booth

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations

Multiple version iconThere are 3 versions of this paper

Date Written: October 31, 2018

Abstract

Although radically different from a traditional payment system, Bitcoin is functional and transmits value over the internet. Having fixed transaction processing capacity, it experiences service delays which motivate users to pay for service priority. These fees fund the computer servers (“miners”) which support Bitcoin. This paper models Bitcoin as a platform that intermediates between users and miners. It derives closed form formulas of the fees and waiting times and studies their properties; compares the economics of the Bitcoin payment system (BPS) to that of a traditional payment system operated by a profit maximizing firm; and suggests protocol design modification to enhance the platform’s efficiency. The appendix describes and explains the main attributes of Bitcoin and the underlying blockchain technology.

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

JEL Classification: D40, D20, L10, L50

Suggested Citation

Huberman, Gur and Leshno, Jacob and Moallemi, Ciamac C., An Economic Analysis of the Bitcoin Payment System (October 31, 2018). Columbia Business School Research Paper No. 17-92. Available at SSRN: https://ssrn.com/abstract=3025604 or http://dx.doi.org/10.2139/ssrn.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)

Chicago Booth ( email )

5807 S. Woodlawn Ave
Chicago, IL 60610
United States

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

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

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