The Economic Limits of Bitcoin and the Blockchain

  • News
  • Thread starter BWV
  • Start date
  • #1
BWV
592
495

Main Question or Discussion Point

Interesting economic paper on the limits of bitcoin:

The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin’s must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system’s vulnerability to a “majority attack”, namely that the computational costs of such an attack 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., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.


http://faculty.chicagobooth.edu/eric.budish/research/Economic-Limits-Blockchain.pdf
 

Answers and Replies

  • #2
33,271
4,980
There are also infrastructure limits on bitcoin and other cryptocurrency miners -- these mining operations take enormous amounts of electricity.

From an article about a month ago in my local paper, The Daily Herald (https://www.heraldnet.com/northwest/in-eastern-washington-denied-bitcoin-miners-turn-belligerent/), talking about a Public Utility District in Grant County, WA.
Since summer 2017, Grant PUD has received 125 new service requests that total more than 2,000 megawatts of electricity, about four times the power needed for all homes, businesses, government institutions and industry in the county. About 75 percent of these requests are from cryptocurrency firms.
For comparison, I just paid my PUD bill today, for just over 500 kWH of electricity for the month of May.

The article also mentioned "hardening" the lobby of the Chelan Co. PUD office, to include bulletproof panels and cameras, to protect PUD employees from angry bitcoin miners whose unauthorized use of electricity was shut off.
 
  • #3
kimberlywoods
Besides electricity issues, there are even more cons. Bitcoin provides no byers protection and your wallet can just be stolen. My friend from work experienced this. If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The coins the investor owned will also be permanently orphaned.
 
  • #4
BWV
592
495
Besides electricity issues, there are even more cons. Bitcoin provides no byers protection and your wallet can just be stolen. My friend from work experienced this. If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The coins the investor owned will also be permanently orphaned.
Case in point
https://www.cnbc.com/2017/12/20/man-lost-127-million-worth-of-bitcoins-and-city-wont-let-him-look.html
 

Related Threads on The Economic Limits of Bitcoin and the Blockchain

  • Last Post
Replies
3
Views
512
Replies
102
Views
19K
  • Last Post
Replies
4
Views
711
Replies
1
Views
419
Replies
14
Views
18K
Replies
7
Views
3K
  • Last Post
Replies
2
Views
2K
  • Last Post
2
Replies
28
Views
12K
Replies
7
Views
2K
Top