Title: The Economic Limits of Bitcoin and the Blockchain
Abstract: The amount of computational power devoted to anonymous, decentralized blockchainssuch as Bitcoin’s must simultaneously satisfy two conditions in equilibrium: (1) a zero-profitcondition among miners, who engage in a rent-seeking competition for the prize associatedwith adding the next block to the chain; and (2) an incentive compatibility condition on thesystem’s vulnerability to a “majority attack”, namely that the computational costs of such anattack must exceed the benefits. Together, these two equations imply that (3) the recurring,“flow”, payments to miners for running the blockchain must be large relative to the one-off,“stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stockversus stock) if both (i) the mining technology used to run the blockchain is both scarce andnon-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse inthe economic value of the blockchain; however, reliance on non-repurposable technology forsecurity and vulnerability to sabotage each raise their own concerns, and point to specificcollapse scenarios. In particular, the model suggests that Bitcoin would be majority attackedif it became sufficiently economically important — e.g., if it became a “store of value” akin togold — which suggests that there are intrinsic economic limits to how economically importantit can become in the first place.
Bio: Eric Budish is the Steven G. Rothmeier Professor of Economics at the University of Chicago, Booth School of Business, a Research Associate at the National Bureau of Economic Research, and Co-Director of the Initiative on Global Markets at Chicago Booth. His main area of research is market design, with specific topics studied including financial markets, matching markets, ticket markets, cryptocurrencies, and incentives for innovation. Budish received his PhD in Business Economics from Harvard University, his MPhil in Economics from Oxford (Nuffield College), and his BA in Economics and Philosophy from Amherst College. Budish’s honors include the Marshall Scholarship, the Sloan Research Fellowship, the AQR Insight Award, the Arrow Award, the Leo Melamed Award, and giving the 2017 AEA-AFA joint luncheon address.
