Bitcoin's Fatal Flaw: The Limited Adoption Problem

NYU Stern School of Business

39 Pages Posted: 20 Mar 2019 Last revised: 17 Oct 2020

See all articles by Franz J. Hinzen

Franz J. Hinzen

New York University (NYU) - Department of Finance

Kose John

New York University (NYU) - Department of Finance

Fahad Saleh

Wake Forest University - Schools of Business

Date Written: October 16, 2020

Abstract

We demonstrate theoretically that Bitcoin's limited adoption arises as an equilibrium outcome rather than as a short-lived property. Our results are driven by negative network effects which arise due to Bitcoin's need for consensus and the existence of network delay. As the Bitcoin network expands, network delay grows thereby prolonging the time needed for generating consensus. In turn, transaction settlement becomes prolonged, and users abandon the system, yielding limited adoption. Increasing transaction rates fails to solve this problem because increasing transaction rates increases fork probabilities which prolongs the consensus process and generates limited adoption.

Keywords: Bitcoin, Limited Adoption, Consensus, Network Delay, Blockchain, Payment Systems, FinTech

JEL Classification: E42, G00, G29

Suggested Citation

Hinzen, Franz J. and John, Kose and Saleh, Fahad, Bitcoin's Fatal Flaw: The Limited Adoption Problem (October 16, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3334262 or http://dx.doi.org/10.2139/ssrn.3334262

Franz J. Hinzen

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012
United States

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Fahad Saleh (Contact Author)

Wake Forest University - Schools of Business

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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