Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System (with Jacob D. Les hno and Ciamac Moallemi)
Abstract:
Bitcoin has emerged as the most prominent cryptocurrency. The underlying B
lockchain technology enables a fully decentralized payment system, where th
e system’s infrastructure is provided by Miners. In the long term, Miners w
ill be compensated by collecting transaction fees from users. The fees emer
ge 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 us
ers. It highlights the tension between the need to finance the system’s inf
rastructure and to minimize congestion costs and offers design modification
s. Remarkably, the unregulated system offers a monopoly service through pro
viders (the miners) who act competitively. Nonetheless, the competitive sup
ply of mining need not be at the socially optimal level.