An Economic Analysis of the Bitcoin Payment System
60 Pages Posted: 28 Aug 2017 Last revised: 15 Nov 2018
Date Written: October 31, 2018
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: Suggested Citation