Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System (with Jacob D. Leshno and Ciamac Moallemi)

Abstract:
Bitcoin has emerged as the most prominent cryptocurrency. The underlying Blockchain technology enables a fully decentralized payment system, where the system’s infrastructure is provided by Miners. In the long term, Miners will be compensated by collecting transaction fees from users. The fees emerge only if the system is congested. We set up a simplified model that shows how fees are determined by the equilibrium of a queueing game played by users. It highlights the tension between the need to finance the system’s infrastructure and to minimize congestion costs and offers design modifications. Remarkably, the unregulated system offers a monopoly service through providers (the miners) who act competitively. Nonetheless, the competitive supply of mining need not be at the socially optimal level.