The Economics of Cryptocurrencies – Bitcoin and Beyond

55 Pages Posted: 5 Oct 2017 Last revised: 16 Oct 2017

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Thorsten V. Koeppl

Queen's University - Department of Economics

Date Written: September 1, 2017

Abstract

How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.

Keywords: Cryptocurrency, Blockchain, Bitcoin, Double Spending, Payment Systems

JEL Classification: E4, E5, L5

Suggested Citation

Chiu, Jonathan and Koeppl, Thorsten V., The Economics of Cryptocurrencies – Bitcoin and Beyond (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3048124 or http://dx.doi.org/10.2139/ssrn.3048124

Jonathan Chiu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Thorsten V. Koeppl

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

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