Bitcoin's Fatal Flaw: The Limited Adoption Problem
NYU Stern School of Business
44 Pages Posted: 20 Mar 2019 Last revised: 17 Dec 2019
Date Written: December 17, 2019
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. We also demonstrate that permissioned blockchains may obtain widespread adoption, thereby highlighting the need for research on alternatives to Bitcoin.
Keywords: Bitcoin, Blockchain, Proof-of-Work, Limited Adoption, Payment Systems, FinTech
JEL Classification: E42, G00, G29
Suggested Citation: Suggested Citation