The economics of cryptocurrencies: Bitcoin and beyond

Arbeitspapier

How well can a cryptocurrency serve as a means of payment? Cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. We formalize this insight through an incentive constraint that rules out double spending and pins down the welfare costs of a cryptocurrency. We find that it is optimal to use seignorage rather than transaction fees to finance costly mining. We estimate that Bitcoin generates a large welfare loss that is about 500 times as large as a monetary economy with 2% inflation. This welfare loss can be lowered in an optimal design to the equivalent of a monetary economy with moderate inflation of about 45%.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2019-40

Classification and Topics

• Classification: Wirtschaft
• Subject: Digital currencies and fintech ; Monetary policy ; Payment clearing andsettlement systems

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chiu, Jonathan ; Koeppl, Thorsten V.
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2019

Further information

• DOI: doi:10.34989/swp-2019-40
• Handle: http://hdl.handle.net/10419/210780
• Last update: 10.03.2025, 11:42 AM CET