Bitcoin's Fatal Flaw: The Limited Adoption Problem

NYU Stern School of Business

44 Pages Posted: 20 Mar 2019 Last revised: 17 Dec 2019

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

McGill University - Desautels Faculty of Management

Date Written: December 17, 2019

Abstract

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

Hinzen, Franz J. and John, Kose and Saleh, Fahad, Bitcoin's Fatal Flaw: The Limited Adoption Problem (December 17, 2019). NYU Stern School of Business. Available at SSRN: https://ssrn.com/abstract=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)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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