An Equilibrium Model of Blockchain-Based Cryptocurrencies

37 Pages Posted: 11 Apr 2018 Last revised: 8 May 2019

See all articles by Engin Iyidogan

Engin Iyidogan

Imperial College Business School

Date Written: January 7, 2019

Abstract

This paper develops an equilibrium model of proof-of-work cryptocurrencies. Equilibrium behaviour of miners and users are characterized for exogenous blockchain protocol metrics. This paper shows that an equilibrium can be achieved in the long run. High fixed mining reward is the reason of instability in current cryptocurrency designs. The equilibrium model has two main implications. First, decentralization and technological improvement in mining are the drivers of low transaction fees and low mining costs. Second, limited block size and mining difficulty, which is endogenously determined, create an incentive mechanism that achieves the sustainability of cryptocurrency in the long run.

Keywords: Blockchain, Bitcoin, Market Design, General Equilibrium

JEL Classification: D47, D58, G10, G29

Suggested Citation

Iyidogan, Engin, An Equilibrium Model of Blockchain-Based Cryptocurrencies (January 7, 2019). Available at SSRN: https://ssrn.com/abstract=3152803 or http://dx.doi.org/10.2139/ssrn.3152803

Engin Iyidogan (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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