1932

Abstract

We survey extant literature on the economics of blockchain fundamentals, with particular focus on Bitcoin, proof-of-work, and proof-of-stake. We formally clarify Bitcoin's economic significance in solving the double-spending problem without a centralized entity. We then transition to the economics literature, highlighting the key endogenous economic interactions among participants in the Bitcoin ecosystem as well as the economics of proof-of-stake and other potential consensus algorithms. Along the way, we discuss various literature that provides important insights regarding fees, forks, and price volatility. We conclude by reflecting on the next generation of blockchain innovations.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-111620-011240
2022-11-01
2024-04-26
Loading full text...

Full text loading...

/deliver/fulltext/financial/14/1/annurev-financial-111620-011240.html?itemId=/content/journals/10.1146/annurev-financial-111620-011240&mimeType=html&fmt=ahah

Literature Cited

  1. Abadi J, Brunnermeier M. 2019. Blockchain economics Work. Pap., Princeton Univ., Princeton NJ:
  2. Aune RT, Kellenstein A, O'Hara M, Slama O. 2017. Footprints on a blockchain: trading and information leakage in distributed ledgers. J. Trading 12:35–13
    [Google Scholar]
  3. Bagaria V, Kannan S, Tse D, Fanti G, Viswanath P. 2019. Prism: deconstructing the blockchain to approach physical limits. Proceedings of the 2019 ACM SIGSAC Conference on Computer and Communications Security585–602 New York: Assoc. Comput. Mach.
    [Google Scholar]
  4. Basu S, Easley D, O'Hara M, Sirer E. 2021. StableFees: a predictable fee market for cryptocurrencies. SSRN Work. Pap. 3318327
  5. Benetton M, Compiani G, Morse A 2021. When cryptomining comes to town: high electricity-use spillovers to the local economy. Work. Pap., Univ. Calif. Berkeley:
  6. Biais B, Bisière C, Bouvard M, Casamatta C. 2019. The blockchain folk theorem. Rev. Financ. Stud. 32:1662–715
    [Google Scholar]
  7. Biais B, Bisière C, Bouvard M, Casamatta C, Menkveld AJ. 2020. Equilibrium Bitcoin pricing. Work. Pap. 48, EconPol Europe Munich:
  8. Capponi A, Jia R. 2021. The adoption of blockchain-based decentralized exchanges Work. Pap., Columbia Univ. New York, NY:
  9. Carlsten M, Kalodner H, Weinberg SM, Narayanan A. 2016. On the instability of Bitcoin without the block reward. Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security154–67 New York: Assoc. Comput. Mach.
    [Google Scholar]
  10. Chaum D 1983. Blind signatures for untraceable payments. Advances in Cryptology, ed. D Chaum, RL Rivest, AT Sherman 199–203 Boston: Springer
    [Google Scholar]
  11. Chod J, Lyandres E. 2021. A theory of ICOs: diversification, agency, and information asymmetry. Manag. Sci. 67:105969–6627
    [Google Scholar]
  12. Chod J, Trichakis N, Tsoukalas G, Aspegren H, Weber M. 2020. On the financing benefits of supply chain transparency and Blockchain adoption. Manag. Sci. 66:4378–96
    [Google Scholar]
  13. Cong LW, He Z. 2019. Blockchain disruption and smart contracts. Rev. Financ. Stud. 32:1754–97
    [Google Scholar]
  14. Cong LW, He Z, Li J. 2021. Decentralized mining in centralized pools. Rev. Financ. Stud. 34:1191–235
    [Google Scholar]
  15. Cong LW, Li Y, Wang N. 2021. Tokenomics: dynamic adoption and valuation. Rev. Financ. Stud. 34:1105–55
    [Google Scholar]
  16. Cong LW, Li Y, Wang N. 2022. Token-based platform finance. J. Financ. Econ. 144:972–91
    [Google Scholar]
  17. de Vries A. 2018. Bitcoin's growing energy problem. Joule 2:801–5
    [Google Scholar]
  18. Easley D, O'Hara M, Basu S. 2019. From mining to markets: the evolution of Bitcoin transaction fees. J. Financ. Econ. 134:91–109
    [Google Scholar]
  19. Eyal I, Gencer AE, Sirer EG, van Renesse R. 2016. Bitcoin-NG: a scalable blockchain protocol. Proceedings of the 13th USENIX Conference on Networked Systems Design and Implementation45–59 Santa Clara, CA: USENIX Assoc.
    [Google Scholar]
  20. Eyal I, Sirer EG 2014. Majority is not enough: Bitcoin mining is vulnerable. Financial Cryptography and Data Security. FC 2014. Lecture Notes in Computer Science, Vol. 8437 N Christin, R Safavi-Naini 436–54 Berlin: Springer
    [Google Scholar]
  21. Fanti G, Kogan L, Viswanath P. 2021. Economics of proof-of-stake payment systems. Work. Pap., Carnegie Mellon Univ. Pittsburgh:
  22. Gan J, Tsoukalas G, Netessine S. 2021. Inventory, speculators, and initial coin offerings. Manag. Sci. 67:914–31
    [Google Scholar]
  23. Genser AE, Basu S, Eyal I, van Renesse R, Sirer EG 2018. Decentralization in Bitcoin and Ethereum networks. Financial Cryptography and Data Security: 22nd International Conference, FC 2018, Nieuwpoort, Curaçao, February 26–March 2, 2018, Revised Selected Papers, ed. S Meiklejohn, K Sako 439–57 Berlin: Springer
    [Google Scholar]
  24. Griffin J, Shams A. 2020. Is Bitcoin really un-tethered?. J. Finance 75:1913–64
    [Google Scholar]
  25. Haber S, Stornetta WS. 1991. How to time-stamp a digital document. J. Cryptol. 3:99–111
    [Google Scholar]
  26. Harvey C, Ramachandran A, Santoro J. 2021. DeFi and the Future of Finance. Hoboken, NJ: Wiley
  27. Hinzen FJ, John K, Saleh F 2021. Bitcoin's limited adoption problem. J. Financ. Econ. 144:2347–69
    [Google Scholar]
  28. Howell ST, Niessner M, Yermack D. 2020. Initial coin offerings: financing growth with cryptocurrency token sales. Rev. Financ. Stud. 33:3925–74
    [Google Scholar]
  29. Huberman G, Leshno JD, Moallemi C. 2021. Monopoly without a monopolist: an economic analysis of the Bitcoin payment system. Rev. Econ. Stud. 88:63011–40
    [Google Scholar]
  30. Irresberger F, John K, Mueller P, Saleh F. 2021. The public blockchain ecosystem: an empirical analysis. Work. Pap., Stern Sch. Bus., New York Univ. New York, NY:
  31. Iyengar G, Saleh F, Sethuraman J, Wang W 2021. Economics of permissioned blockchain adoption Work. Pap., Columbia Univ. New York, NY:
  32. John K, Rivera T, Saleh F. 2021. Economic implications of scaling blockchains: why the consensus protocol matters Work. Pap., Stern Sch. Bus., New York Univ. New York, NY:
  33. Kiayias A, Panagiotakos G 2017. On trees, chains and fast transactions in the blockchain. Progress in Cryptology—LATINCRYPT 2017. 5th International Conference on Cryptology and Information Security in Latin America T Lange, O Dunkelman 327–51 Cham, Switz: Springer
    [Google Scholar]
  34. King S, Nadal S. 2012. PPCoin: peer-to-peer crypto-currency with proof-of-stake. Work. Pap. https://bitcoin.peryaudo.org/vendor/peercoin-paper.pdf
  35. Lee J, Li T, Shin D 2021. The wisdom of crowds in FinTech: evidence from initial coin offerings. Rev. Corp. Finance Stud. 11:11–46
    [Google Scholar]
  36. Lehar A, Parlour C. 2021. Decentralized exchanges. Work. Pap., Univ. Calgary Can: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905316
  37. Li J, Mann W. 2020. Digital tokens and platform building. SSRN Work. Pap. 3088726
  38. Li T, Shin D, Wang B. 2021. Cryptocurrency pump-and-dump schemes. Work. Pap., Univ. Florida Gainesville: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3267041
  39. Liu Y, Tsyvinski A. 2021. Risks and returns of cryptocurrency. Rev. Financ. Stud. 34:2689–727
    [Google Scholar]
  40. Liu Y, Tsyvinski A, Wu X. 2022. Common risk factors in cryptocurrency. J. Finance 77:1133–77
    [Google Scholar]
  41. Makarov I, Schoar A. 2019. Trading and arbitrage in cryptocurrency markets. J. Financ. Econ. 135:293–319
    [Google Scholar]
  42. Mayer S. 2021. Token-based platforms and speculators SSRN Work. Pap 3471977
  43. Nakamoto S. 2008. Bitcoin: a peer-to-peer electronic cash system. Work. Pap. https://bitcoin.org/bitcoin.pdf
  44. Narayanan A, Bonneau J, Felten E, Miller A, Goldfeder S. 2016. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction Princeton, NJ: Princeton Univ. Press
  45. Narayanan A, Clark J. 2017. Bitcoin's academic pedigree. Commun. ACM 60:1236–45
    [Google Scholar]
  46. Pagnotta ES. 2022. Decentralized money: Bitcoin prices and blockchain security. Rev. Financ. Stud. 35:2866–907
    [Google Scholar]
  47. Park A. 2021. The conceptual flaws of constant product automated market making Work. Pap., Univ. Toronto Toronto:
  48. Rosu I, Saleh F. 2021. Evolution of shares in a proof-of-stake cryptocurrency. Manag. Sci. 67:661–72
    [Google Scholar]
  49. Saleh F. 2021. Blockchain without waste: proof-of-stake. Rev. Financ. Stud. 34:1156–90
    [Google Scholar]
/content/journals/10.1146/annurev-financial-111620-011240
Loading
  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error