8 ms·

Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin System [pdf]

118 points by Spellman 9y ago

netvarun 9y ago
On a related note there was a paper presentation on the economics analysis of the blockchain from the Toulouse School of Economics a few months back. [1] Presentation http://econ.sciences-po.fr/sites/default/files/file/melissa/slides%20blockchain%20april%2026.pdf http://econ.sciences-po.fr/sites/default/files/file/melissa/... [2] Presentation https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2017/wp_tse_817.pdf https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/...
snikeris 9y ago
Abstract: Many crypto-currencies, Bitcoin being the most prominent, are reliable electronic payment systems that operate without a central, trusted authority. They are enabled by blockchain technology, which deploys cryptographic tools and game theoretic incentives to create a two-sided platform. Profit maximizing computer servers called miners provide the infrastructure of the system. Its users can send payments anonymously and securely. Absent a central authority to control the system, the paper seeks to understand the operation of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? A simplified economic model that captures the system’s properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system’s limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
virtuexru 9y ago
From the conclusion which I thought was really interesting: > Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts. > Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.
- nosuchthing 9y ago
  Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts. There's no need to regulate Bitcoin the protocol or software. The gateways, such as the exchanges are more of an essential element in regard to regulatory and economic influence on the cryptocoin economies.
  - stale2002 9y ago
    What if I were to tell you, that if bitcoin were to truly succeed, you won't NEED a gateway or exchange. You will just transact in bitcoin.
    - nosuchthing 9y ago
      In a perfect world no true Scottsman would trade BTC directly. Bitcoin will struggle as long as their development team struggles with fixing the 3-4 transactions per second limit. $20 fees to process a transaction in 20 minutes? Good luck.
      - runeks 9y ago
        You don’t need to touch the blockchain in order to receive a payment denominated in bitcoins. Every day millions of bitcoin-denominated transactions take place on exchanges using a centralized clearing system (you deposit BTC, transact, then withdraw BTC). All we need is to standardize this behavior, such that each exchange doesn’t have its own closed system (essentially an SQL database with balances). Rather, we’d using an open clearing protocol, with multiple issuers in the same way we use email with multiple email providers. Each issuer/email provider is centralized, but the system as a whole is decentralized (similar to Git as well). The simplest example of such a protocol is Stroem[1], which offers trustless micro-payments for consumers/payers, such that only merchants/payees take risks (which are proportional to how often they redeem their BTC on the blockchain). So, merchants get to choose their risk appetite: the longer they wait with redeeming, the lower the per-transaction fee, and the more often they redeem the more the security resembles on-chain transactions, with proportionally higher fees. [1] https://www.strawpay.com/docs/stroem-payment-system.pdf https://www.strawpay.com/docs/stroem-payment-system.pdf
rb808 9y ago
That is a very 2015 view - now days people don't buy bitcoin for its use in transactions, they buy bitcoin because it keeps going up. The more it goes up the less people are likely to spend it. We don't need many miners if people never spend it. Here is one high profile example http://avc.com/2017/08/store-of-value-vs-payment-system/ http://avc.com/2017/08/store-of-value-vs-payment-system/ (of course when it starts to go back to zero people will all try to sell and the infrastructure wont be there) PS: The paper deals with a very interesting problem about how miners are paid. I dont want to take away from it. Just that I feel the whole BTC environment has taken a new turn that makes the problem less of an issue.
- virtuexru 9y ago
  > people don't buy bitcoin for its use in transactions I'd beg to differ.. sure there is definitely a percentage of HODL'ers but to say people don't use it in transactions is straight up lunacy. https://blockchain.info/charts/n-transactions?timespan=all https://blockchain.info/charts/n-transactions?timespan=all https://blockchain.info/charts/trade-volume?timespan=all https://blockchain.info/charts/trade-volume?timespan=all
  - soneca 9y ago
    Well, don't these charts only reflect new people buying Bitcoin (as an investment)? https://blockchain.info/pt/charts/n-unique-addresses?timespan=all https://blockchain.info/pt/charts/n-unique-addresses?timespa...
    - clarkmoody 9y ago
      You could probably look at the distribution of transaction sizes to try and determine how much is investment vs commerce. A bunch of $1-10 transactions are less likely to be speculators getting into a position.
  - JumpCrisscross 9y ago
    Those data don't differentiate bitcoins bought for investment and for trading.
nosuchthing 9y ago
This paper mainly focuses on the miner-transaction fee-protocol economics, completely neglecting the real world economic interactions and history of BTC. Satoshi's core design of bitcoin minting favored early adopters to mint coins at extremely low cost and processing power, this is why someone traded 10,000 bitcoins for two pizzas because it took no effort to generate those early on. Satoshi decided to decrease the amount of rewards as the network grew older and presumably more users would adopt it, why? This is a marketing gimmick seen with beanie babies and base ball cards where the cost of production is low yet you tell customers the supply is very limited so you must act quick while supplies last. And the supplies of this type of service are increasing with every day as alternative networks offering the same service (blockchains, trustless distributed databases) are increasingly sprouting up. The question speculators should be considering when evaluating the economic worth in trading bitcoins or any other altcoin should certainly take into consideration what value the network provides them versus alternative service networks, what the risk of volatility in each network is especially because extreme drops in value are much easier than rises in price as liquidity is severely limited and many "whale" accounts often own enough supply of coins to crash the entire market [1] [2] [3]. Exchanges like MTGox, Bitfinex, etc have been suspected of manipulating exchange rates and insider trading via maliciously scripted exchange bots within the exchange [4] [5] [6]. [1] https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html https://bitinfocharts.com/top-100-richest-bitcoin-addresses.... [2] https://etherscan.io/tokenrichlist https://etherscan.io/tokenrichlist [3] ETH had a presale which sold for $0.35 USD - $0.45 USD. The vast majority of cryptocoin variations premine or rapidly mint their supply, and then game speculators to pass the bag off to greater fools in what is essentialy a pyramid scheme backed by a network of databases running double-entry bookkeeping marketed as magic technology that's changing everything. [4] https://www.theguardian.com/technology/2014/may/29/bitcoin-bots-bought-millions-in-the-last-days-of-mt-gox https://www.theguardian.com/technology/2014/may/29/bitcoin-b... [5] https://medium.com/@bitfinexed/are-fraudulent-tethers-being-used-for-margin-lending-on-bitfinex-5de9dd80f330 https://medium.com/@bitfinexed/are-fraudulent-tethers-being-... [6] https://medium.com/@bitfinexed/meet-spoofy-how-a-single-entity-dominates-the-price-of-bitcoin-39c711d28eb4 https://medium.com/@bitfinexed/meet-spoofy-how-a-single-enti...
- AgentME 9y ago
rothbardrand 9y ago
This paper is a reasonable attempt to model bitcoin by people who only see the surface of what bitcoin is. Bitcoin is like an Onion- it has layers, and makes you cry. As I have come to understand it there are many layers- both in technology and economics- at work here. Most obvious is layer 2 tech like lightening network, side chains, and segwit. (which is a second layer inside the blockchain.) But as you come to understand it better you realize, for instance, that the network has been under attack and the cost of fees is mainly due to that (when its not under attack because the attackers are moving their bitcoins) you can do micropayments-- like $1.50 sent for $0.05 transaction fee with 3 hours clearing-- which is faster and cheaper than credit cards. You get censorship resistance for free!
- quickthrower2 9y ago
  I can buy a coffee with a CC immediately but Bitcoin I need to wait 3 hrs?
  - clarkmoody 9y ago
    Bitcoin clears and settles within a few blocks. Credit cards may reverse a transaction for 90 days. The merchant could also let you leave after sending Bitcoin if the risk of double-spending was low enough (and network congestion was down). Lightning Network will enable instant transactions without needing to wait for block confirmation, which is a true payments solution.
  - trophycase 9y ago
    You don't need a globally redundant ledger to store your coffee purchases. The benefits of a blockchain over traditional financial systems is borderlessness and censorship resistance. Nobody is stopping you from buying coffee, why would you need a blockchain?
    - dajohnson89 9y ago
      Expand from coffee to hamburgers, to gas station purchases, to groceries, etc, and soon you have ruled out a major percentage of the consumer economy. Not a deal breaker, but lots of hype for crypto is how it can replace fiat transactions wholesale or damn near it.
iamrobinhood123 9y ago
Speaking of economic views, I think that people tend to overlook the most fundamental part of the Blockchain based currency phenomenon today. While the technology is great, it tends to overshadow the fundamental observation that these cryptocurrencies are first and foremost currencies and then afterwards technologies. Perhaps Hacker News is not the place to have such a view, but it ought to be stated. There is a lot of misinformation out there and a lot of excitement, we ought to continually remind ourselves of this truth. These currencies and their intrinsic value are subject to the same rules of all regular currencies: supply and demand. Do people believe that these are valuable or not? The economic view trumps the technological view at the end of the day. http://benshieldsblog-blog.tumblr.com/ http://benshieldsblog-blog.tumblr.com/ https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_EHavFHnN4385XfvKilAc/edit https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_E...

118 points by Spellman 9y ago

On a related note there was a paper presentation on the economics analysis of the blockchain from the Toulouse School of Economics a few months back. [1] Presentation http://econ.sciences-po.fr/sites/default/files/file/melissa/slides%20blockchain%20april%2026.pdf http://econ.sciences-po.fr/sites/default/files/file/melissa/... [2] Presentation https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2017/wp_tse_817.pdf https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/...

snikeris 9y ago

Abstract: Many crypto-currencies, Bitcoin being the most prominent, are reliable electronic payment systems that operate without a central, trusted authority. They are enabled by blockchain technology, which deploys cryptographic tools and game theoretic incentives to create a two-sided platform. Profit maximizing computer servers called miners provide the infrastructure of the system. Its users can send payments anonymously and securely. Absent a central authority to control the system, the paper seeks to understand the operation of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? A simplified economic model that captures the system’s properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system’s limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.

virtuexru 9y ago

From the conclusion which I thought was really interesting: > Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts. > Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.

nosuchthing 9y ago
Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts. There's no need to regulate Bitcoin the protocol or software. The gateways, such as the exchanges are more of an essential element in regard to regulatory and economic influence on the cryptocoin economies.
- stale2002 9y ago
  What if I were to tell you, that if bitcoin were to truly succeed, you won't NEED a gateway or exchange. You will just transact in bitcoin.
  - nosuchthing 9y ago
    In a perfect world no true Scottsman would trade BTC directly. Bitcoin will struggle as long as their development team struggles with fixing the 3-4 transactions per second limit. $20 fees to process a transaction in 20 minutes? Good luck.
    - runeks 9y ago
      You don’t need to touch the blockchain in order to receive a payment denominated in bitcoins. Every day millions of bitcoin-denominated transactions take place on exchanges using a centralized clearing system (you deposit BTC, transact, then withdraw BTC). All we need is to standardize this behavior, such that each exchange doesn’t have its own closed system (essentially an SQL database with balances). Rather, we’d using an open clearing protocol, with multiple issuers in the same way we use email with multiple email providers. Each issuer/email provider is centralized, but the system as a whole is decentralized (similar to Git as well). The simplest example of such a protocol is Stroem[1], which offers trustless micro-payments for consumers/payers, such that only merchants/payees take risks (which are proportional to how often they redeem their BTC on the blockchain). So, merchants get to choose their risk appetite: the longer they wait with redeeming, the lower the per-transaction fee, and the more often they redeem the more the security resembles on-chain transactions, with proportionally higher fees. [1] https://www.strawpay.com/docs/stroem-payment-system.pdf https://www.strawpay.com/docs/stroem-payment-system.pdf

rb808 9y ago

That is a very 2015 view - now days people don't buy bitcoin for its use in transactions, they buy bitcoin because it keeps going up. The more it goes up the less people are likely to spend it. We don't need many miners if people never spend it. Here is one high profile example http://avc.com/2017/08/store-of-value-vs-payment-system/ http://avc.com/2017/08/store-of-value-vs-payment-system/ (of course when it starts to go back to zero people will all try to sell and the infrastructure wont be there) PS: The paper deals with a very interesting problem about how miners are paid. I dont want to take away from it. Just that I feel the whole BTC environment has taken a new turn that makes the problem less of an issue.

virtuexru 9y ago
> people don't buy bitcoin for its use in transactions I'd beg to differ.. sure there is definitely a percentage of HODL'ers but to say people don't use it in transactions is straight up lunacy. https://blockchain.info/charts/n-transactions?timespan=all https://blockchain.info/charts/n-transactions?timespan=all https://blockchain.info/charts/trade-volume?timespan=all https://blockchain.info/charts/trade-volume?timespan=all
- soneca 9y ago
  Well, don't these charts only reflect new people buying Bitcoin (as an investment)? https://blockchain.info/pt/charts/n-unique-addresses?timespan=all https://blockchain.info/pt/charts/n-unique-addresses?timespa...
  - clarkmoody 9y ago
    You could probably look at the distribution of transaction sizes to try and determine how much is investment vs commerce. A bunch of $1-10 transactions are less likely to be speculators getting into a position.
- JumpCrisscross 9y ago
  Those data don't differentiate bitcoins bought for investment and for trading.

nosuchthing 9y ago

This paper mainly focuses on the miner-transaction fee-protocol economics, completely neglecting the real world economic interactions and history of BTC. Satoshi's core design of bitcoin minting favored early adopters to mint coins at extremely low cost and processing power, this is why someone traded 10,000 bitcoins for two pizzas because it took no effort to generate those early on. Satoshi decided to decrease the amount of rewards as the network grew older and presumably more users would adopt it, why? This is a marketing gimmick seen with beanie babies and base ball cards where the cost of production is low yet you tell customers the supply is very limited so you must act quick while supplies last. And the supplies of this type of service are increasing with every day as alternative networks offering the same service (blockchains, trustless distributed databases) are increasingly sprouting up. The question speculators should be considering when evaluating the economic worth in trading bitcoins or any other altcoin should certainly take into consideration what value the network provides them versus alternative service networks, what the risk of volatility in each network is especially because extreme drops in value are much easier than rises in price as liquidity is severely limited and many "whale" accounts often own enough supply of coins to crash the entire market [1] [2] [3]. Exchanges like MTGox, Bitfinex, etc have been suspected of manipulating exchange rates and insider trading via maliciously scripted exchange bots within the exchange [4] [5] [6]. [1] https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html https://bitinfocharts.com/top-100-richest-bitcoin-addresses.... [2] https://etherscan.io/tokenrichlist https://etherscan.io/tokenrichlist [3] ETH had a presale which sold for $0.35 USD - $0.45 USD. The vast majority of cryptocoin variations premine or rapidly mint their supply, and then game speculators to pass the bag off to greater fools in what is essentialy a pyramid scheme backed by a network of databases running double-entry bookkeeping marketed as magic technology that's changing everything. [4] https://www.theguardian.com/technology/2014/may/29/bitcoin-bots-bought-millions-in-the-last-days-of-mt-gox https://www.theguardian.com/technology/2014/may/29/bitcoin-b... [5] https://medium.com/@bitfinexed/are-fraudulent-tethers-being-used-for-margin-lending-on-bitfinex-5de9dd80f330 https://medium.com/@bitfinexed/are-fraudulent-tethers-being-... [6] https://medium.com/@bitfinexed/meet-spoofy-how-a-single-entity-dominates-the-price-of-bitcoin-39c711d28eb4 https://medium.com/@bitfinexed/meet-spoofy-how-a-single-enti...

AgentME 9y ago

rothbardrand 9y ago

This paper is a reasonable attempt to model bitcoin by people who only see the surface of what bitcoin is. Bitcoin is like an Onion- it has layers, and makes you cry. As I have come to understand it there are many layers- both in technology and economics- at work here. Most obvious is layer 2 tech like lightening network, side chains, and segwit. (which is a second layer inside the blockchain.) But as you come to understand it better you realize, for instance, that the network has been under attack and the cost of fees is mainly due to that (when its not under attack because the attackers are moving their bitcoins) you can do micropayments-- like $1.50 sent for $0.05 transaction fee with 3 hours clearing-- which is faster and cheaper than credit cards. You get censorship resistance for free!

quickthrower2 9y ago
I can buy a coffee with a CC immediately but Bitcoin I need to wait 3 hrs?
- clarkmoody 9y ago
  Bitcoin clears and settles within a few blocks. Credit cards may reverse a transaction for 90 days. The merchant could also let you leave after sending Bitcoin if the risk of double-spending was low enough (and network congestion was down). Lightning Network will enable instant transactions without needing to wait for block confirmation, which is a true payments solution.
- trophycase 9y ago
  You don't need a globally redundant ledger to store your coffee purchases. The benefits of a blockchain over traditional financial systems is borderlessness and censorship resistance. Nobody is stopping you from buying coffee, why would you need a blockchain?
  - dajohnson89 9y ago
    Expand from coffee to hamburgers, to gas station purchases, to groceries, etc, and soon you have ruled out a major percentage of the consumer economy. Not a deal breaker, but lots of hype for crypto is how it can replace fiat transactions wholesale or damn near it.

iamrobinhood123 9y ago

Speaking of economic views, I think that people tend to overlook the most fundamental part of the Blockchain based currency phenomenon today. While the technology is great, it tends to overshadow the fundamental observation that these cryptocurrencies are first and foremost currencies and then afterwards technologies. Perhaps Hacker News is not the place to have such a view, but it ought to be stated. There is a lot of misinformation out there and a lot of excitement, we ought to continually remind ourselves of this truth. These currencies and their intrinsic value are subject to the same rules of all regular currencies: supply and demand. Do people believe that these are valuable or not? The economic view trumps the technological view at the end of the day. http://benshieldsblog-blog.tumblr.com/ http://benshieldsblog-blog.tumblr.com/ https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_EHavFHnN4385XfvKilAc/edit https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_E...