Trust at Scale: The Economic Limits of Cryptocurrencies and Blockchains
Trust at Scale: The Economic Limits of Cryptocurrencies and Blockchains
Quarterly Journal of Economics, (2025): 140, no.1, 1-62. [PDF]Abstract
Satoshi Nakamoto invented a new form of trust. This paper presents a three equation argument that Nakamoto’s new form of trust, while undeniably ingenious, is extremely expensive: the recurring, ‘flow’ payments to the anonymous, decentralized compute power that maintains the trust must be large relative to the one-off, ‘stock’ benefits of attacking the trust. This result also implies that the cost of securing the trust grows linearly with the potential value of attack — e.g., securing against a $1 billion attack is 1000 times more expensive than securing against a $1 million attack. A way out of this flow-stock argument is if both (i) the compute power used to maintain the trust is non-repurposable, and (ii) a successful attack would cause the economic value of the trust to collapse. However, vulnerability to economic collapse is itself a serious problem, and the model points to specific collapse scenarios. The analysis thus suggests a ‘pick your poison’ economic critique of Bitcoin and its novel form of trust: it is either extremely expensive relative to its economic usefulness or vulnerable to sabotage and collapse.
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Earlier Version
June 2022 Version
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June 2018 version, NBER Working Paper No. 24717
National Bureau of Economic Research Working Paper Series, No. 24717, 2018.[PDF] [All Related Material]
