Bitcoin's Fatal Flaw: The Limited Adoption Problem
NYU Stern School of Business
42 Pages Posted: 20 Mar 2019 Last revised: 21 Aug 2019
Date Written: August 14, 2019
Bitcoin remains sparsely adopted even a decade after its birth. We demonstrate theoretically that this limited adoption arises as an inescapable equilibrium outcome rather than as a transient feature. We establish such a result for a wide class of blockchains that employ Proof-of-Work. Our results arise due to three features: (1) an artificial supply constraint, (2) free entry to the validator network, and (3) a need for consensus. Network delay precludes relaxing the supply constraint as a solution. Nonetheless, we demonstrate that permissioned blockchains may obtain widespread adoption, thereby highlighting the need for research on alternatives to Bitcoin.
Keywords: Bitcoin, Libra, Blockchain, Proof-of-Work, Limited Adoption, FinTech
JEL Classification: E42, G00, G29
Suggested Citation: Suggested Citation