An Equilibrium Model of Blockchain-Based Cryptocurrencies

36 Pages Posted: 11 Apr 2018 Last revised: 9 Jun 2020

See all articles by Engin Iyidogan

Engin Iyidogan

SKEMA Business School - Univ Cote d'Azur

Date Written: January 10, 2020

Abstract

This paper develops an equilibrium model of proof-of-work cryptocurrencies. Equilibrium behaviour of miners and users are characterized for exogenous blockchain protocol metrics. This paper shows that an equilibrium between miners and users can be achieved in the long run. High fixed mining rewards are the reason for instability in current cryptocurrency designs. The equilibrium model has two key implications: first, decentralisation and technological improvement in mining are drivers of low transaction fees and low mining costs in a proof-of-work cryptocurrency environment; and second, limited block size and mining difficulty create an incentive mechanism that achieves cryptocurrency sustainability in the long run.

Keywords: Blockchain, Bitcoin, Market Design, General Equilibrium

JEL Classification: D47, D58, G10, G29

Suggested Citation

Iyidogan, Engin, An Equilibrium Model of Blockchain-Based Cryptocurrencies (January 10, 2020). Available at SSRN: https://ssrn.com/abstract=3152803 or http://dx.doi.org/10.2139/ssrn.3152803

Engin Iyidogan (Contact Author)

SKEMA Business School - Univ Cote d'Azur ( email )

Lille
France

HOME PAGE: http://sites.google.com/view/enginiyidogan

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