Monopoly without a monopolist : An economic analysis of the bitcoin payment system

Monopoly without a monopolist : An economic analysis of the bitcoin payment system. Jacob D. Leshno, Gur Huberman, and Ciamac Moallemi. BIS Central Bank Research Hub - Series: Bank of Finland Discussion Papers. https://www.bis.org/cbhub/list/series/sid_66/index.htm

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.