Proof-of-Work’s Limited Adoption Problem
36 Pages Posted: 20 Mar 2019
Date Written: February 28, 2019
We demonstrate that a limited adoption problem arises endogenously in a Proof-of-Work (PoW) payments blockchain. Increased transaction demand increases fees because PoW imposes an artificial supply constraint. The increased fees in turn induce validators to enter the network because of PoW’s permissionless nature. The increased network size protracts the consensus process and thereby delays payment confirmation. Given access to traditional payment systems, users prefer to transact via the blockchain only if they possess extreme insensitivity to delays. A PoW payments blockchain therefore cannot obtain widespread adoption. A permissioned blockchain offers an alternative to overcome this problem because such a blockchain neither imposes PoW’s artificial supply constraint nor admits free entry among validators. Nonetheless, validators may collude on such a blockchain if implemented with a standard consensus protocol. We offer an alternative consensus protocol that overcomes such collusion. Our protocol employs the blockchain’s native cryptocurrency to induce the desired behavior and thereby provides both expedient transaction processing and blockchain security.
Keywords: Blockchain, Proof-of-Work, Limited Adoption, FinTech, Stake
JEL Classification: E42, G00, G29
Suggested Citation: Suggested Citation