More (or Less) Economic Limits of the Blockchain

18 Pages Posted: 4 Dec 2019

See all articles by Neil Gandal

Neil Gandal

Berglas School of Economics, Tel Aviv University; Centre for Economic Policy Research (CEPR)

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 3 versions of this paper

Date Written: November 2019

Abstract

This paper extends the blockchain sustainability framework of Budish (2018) to consider proof of stake (in addition to proof of work) consensus mechanisms and permissioned (where the number of nodes are fixed) networks. It is demonstrated that an economically sustainable network will involve the same cost regardless of whether it is proof of work or proof of stake although in the later the cost will take the form of illiquid financial resources. In addition, it is shown that regulating the number of nodes (as in a permissioned network) does not lead to additional cost savings that cannot otherwise be achieved via a setting of block rewards in a permissionless (i.e., free entry) network. This suggests that permissioned networks will not be able to economize on costs relative to permissionless networks.

Keywords: blockchain, proof-of-stake, Proof-of-Work

Suggested Citation

Gandal, Neil and Gans, Joshua S., More (or Less) Economic Limits of the Blockchain (November 2019). CEPR Discussion Paper No. DP14154. Available at SSRN: https://ssrn.com/abstract=3496644

Neil Gandal (Contact Author)

Berglas School of Economics, Tel Aviv University ( email )

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Israel
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HOME PAGE: http://www.neilgandal.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joshua S. Gans

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

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