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More (or Less) Economic Limits of the Blockchain

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  • Joshua S. Gans
  • Neil Gandal

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.

Suggested Citation

  • Joshua S. Gans & Neil Gandal, 2019. "More (or Less) Economic Limits of the Blockchain," NBER Working Papers 26534, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26534
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    References listed on IDEAS

    as
    1. June Ma & Joshua S. Gans & Rabee Tourky, 2018. "Market Structure in Bitcoin Mining," NBER Working Papers 24242, National Bureau of Economic Research, Inc.
    2. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    3. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
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    Cited by:

    1. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    2. Rodney J. Garratt & Maarten R. C. van Oordt, 2023. "Why Fixed Costs Matter for Proof-of-Work–Based Cryptocurrencies," Management Science, INFORMS, vol. 69(11), pages 6482-6507, November.
    3. David Cerezo Sánchez, 2022. "Pravuil: Global Consensus for a United World," FinTech, MDPI, vol. 1(4), pages 1-20, October.
    4. Zhong Xu & Chuanwei Zou, 2021. "What can blockchain do and cannot do?," China Economic Journal, Taylor & Francis Journals, vol. 14(1), pages 4-25, January.
    5. David Cerezo S'anchez, 2021. "Pravuil: Global Consensus for a United World," Papers 2105.10464, arXiv.org.
    6. Yun Kuen Cheung & Stefanos Leonardos & Georgios Piliouras & Shyam Sridhar, 2021. "From Griefing to Stability in Blockchain Mining Economies," Papers 2106.12332, arXiv.org.

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    More about this item

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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