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] [Podcast]Abstract
Satoshi Nakamoto (2008) invented a new kind of economic system that does not need the support of government or rule of law. Trust and security instead arise from a combination of cryptography and economic incentives, all in a completely anonymous and decentralized system. This article shows that Nakamoto’s novel form of trust, while undeniably ingenious, is deeply economically limited. The core argument is three equations. A zero-profit condition on the quantity of honest blockchain “trust support” (work, stake, etc.) and an incentive-compatibility condition on the system’s security against majority attack (the Achilles heel of all forms of permissionless consensus) together imply an equilibrium constraint, which says that the “flow” cost of blockchain trust has to be large at all times relative to the benefits of attacking the system. This is extremely expensive relative to traditional forms of trust and scales linearly with the value of attack. In scenarios that represent Nakamoto trust becoming a more significant part of the global financial system, the cost of trust would exceed global GDP. Nakamoto trust would become more attractive if an attacker lost the stock value of their capital in addition to paying the flow cost of attack, but this requires either collapse of the system (hardly reassuring) or external support from rule of law. The key difference between Nakamoto trust and traditional trust grounded in rule of law and complementary sources, such as reputations, relationships, and collateral, is economies of scale: society or a firm pays a fixed cost to enjoy trust over a large quantity of economic activity at low or zero marginal cost.
Awards
Lead Article
Appendices
Online Appendix
[PDF]
Sources for Appendix C: 51% Attacks, Crypto Thefts and Crypto Collapses to Date
[PDF]Earlier Versions
June 2022 working paper version (see Section 7 on Bitcoin collapse scenarios)
Draft updated June 10, 2022.[PDF] [All Related Material]
June 2018 NBER Working Paper version (see early versions of equations [1]-[3] and Bitcoin collapse scenarios)
National Bureau of Economic Research Working Paper Series, No. 24717, 2018.[PDF] [All Related Material]
Slides
Slides, 2024 Applied Theory Seminar
Chicago Applied Theory Seminar, October 22, 2024. [PDF]
Slides: Experts Panel Conference (October 2024)
Clark Center Finance Experts Panel Conference, October 4, 2024. [PDF]
Presentation on Bitcoin Research at the May 2019 Atlanta Fed Financial Markets Conference
Atlanta Fed Financial Markets Conference, May 19, 2019. [PDF]Press Coverage
Bitcoin Holders Have No Choice but to Trust in Chinese Crypto Miners
MarketWatch, Mark Hulbert, May 28, 2021 [PDF]
Think GameStop Is Wild? Meet Dogecoin, the Meme-Inspired Digital Currency That Began As a Joke and Is Now Worth Billions
Chicago Tribune, John Keilman, Feb 04, 2021 [PDF]
Bitcoin Is Less Secure Than Most People Think
Marginal Revolution, Alex Tabarrok, Jan 07, 2019 [PDF]
Why Bitcoin Will Never Replace Gold
Barron's, Mark Hulbert, Jul 31, 2018 [PDF]
Bitcoin Looks More Like Gold Than a Currency
Bloomberg, Noah Smith, Jul 11, 2018 [PDF]Public Talks
The Economic Limits of Cryptocurrencies and Anonymous, Decentralized Trust on the Blockchain (April 2023)
Booth All-Faculty Seminar, April 18, 2023.
Harvard Harris Lecture: The Economics of Cryptocurrencies (November 2022)
Harris Lecture at Harvard University, November 9, 2022.
Northwestern University (May 2022)
Northwestern University Joint CET/Math Center Conference, May 31, 2022. [PDF]
The Economics of Cryptocurrencies (April 2022)
Oxford University Economics Department, April 6, 2022.Panel Discussion
Remarks at Finance Experts Panel Conference (Oct 2024)
Clark Center Finance Experts Panel Conference, October 4, 2024. [PDF]
AFA panel “Blockchain: Myth and Reality”
The American Finance Association, January 4, 2019.Podcast
Crypto’s Fatal Flaw: Trust, Scale, and the Economics of Blockchain
The Pie: University of Chicago's Economics Podcast, April 1, 2025.
Freakonomics Podcast, Does the Crypto Crash Mean the Blockchain Is Over?
Stephen J. DubnerFreakonomics Podcast, June 2022. [PDF]
Video