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.
The paper, Monopoly Without Monopolists, is here.
Maybe Bitcoin €™s devotees are right, and it €™s the currency of the future. Or perhaps it €™s a ridiculous joke €”a speculative, hilarious enterprise taken to its most insane conclusion. Given that the founder is nowhere to be found, it feels like a hoax, a parody of the global economy. That the technology used to implement it has, so far, shown itself to be impeccable and completely functional, and that it €™s actually being exchanged, just makes it a better joke. The truth is, it doesn €™t much matter if it €™s a joke or not. It works.
What’s interesting here is the steady move away from money as a palpable object to money as trust: first (relatively speaking) we based our economy on gold; next it was all about the paper money; finally(?) it’s become all about trust.
I suppose you could argue it’s always been about trust: money is purely notional, after all.
We once relied on the Federal government to maintain stores of gold, the price of which determining the amount of currency issued. But the price of gold itself was always subjective.
When we untied that apron string and started issuing currency based merely on the ‘faith and full backing of the United States government’ we simply cut out the golden middleman; U.S. currency was valid because we said it was.
Bitcoin is valid tender simply because it exists.
Much in the same way labor and barter for same is valid.
This will be fun to watch.