The Economic Limits of Bitcoin and Anonymous, Decentralized Trust on the Blockchain

Draft: June 2022. [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.

Earlier Version

June 2018 version, NBER Working Paper No. 24717

National Bureau of Economic Research Working Paper Series, No. 24717, 2018.
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The Economic Limits of Bitcoin and Anonymous, Decentralized Trust on the Blockchain