Bitcoin's Fatal Flaw: The Limited Adoption Problem
NYU Stern School of Business
32 Pages Posted: 20 Mar 2019 Last revised: 14 May 2020
Date Written: May 6, 2020
Bitcoin remains sparsely adopted even a decade after its birth. We demonstrate theoretically that this limited adoption arises as an equilibrium outcome rather than as a transient feature. Our results arise primarily because Bitcoin's design precludes expanding supply as a response to heightened demand. We demonstrate that expanding supply prolongs Bitcoin's consensus process, thereby generating a dilemma. Either supply does not keep pace with demand so that prohibitive delays arise for traditional reasons, or supply keeps pace with demand and prohibitive delays arise due to the prolonged consensus process. In either case, prohibitive delays generate limited adoption as an equilibrium outcome.
Keywords: Bitcoin, Blockchain, Proof-of-Work, Limited Adoption, Payment Systems, FinTech
JEL Classification: E42, G00, G29
Suggested Citation: Suggested Citation