Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

This is the title of a Bank of Finland working paper by Gur Huberman, Jacob D. Leshno and Ciamac Moallemi.

Though fairly technical, the paper has some interesting observations:

Starting with the simple questions of who pays for the Bitcoin payment system, why and how much, this paper proceeds to analyze the economics underlying that distributed system. Transaction fees are paid by users who wish to gain processing priority over other users and avoid delays. The system’s infrastructure is provided by miners, who compete and provide their services at cost. Our analysis identifies a relation between congestion and transaction fees, which matches features of the empirical data, as seen in Figure 4. Congestion is essential for raising revenue from users to fund miners’ provision of infrastructure.

The paper draws a comparison between the economic structures of the distributed Bitcoin system and a traditional electronic payment systems operated by a monopolist. Several additional differences should be noted. As opposed to traditional systems, the Bitcoin system does not require trust in any entity. However, the Bitcoin system cannot provided some services: transaction cannot be reversed in case of error or fraud, and users who lose the credentials to their account have no way of retrieving their balance. As such, Bitcoin may be more comparable to cash than to a modern electronic payment system. Bitcoin is a monopoly run by a protocol, not by a managing organization. Familiar monopolies are run by managing organizations with discretion to determine and then change prices, offerings and rules. Monopolies are often regulated to prevent or at least mitigate their abuse of power.

Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts.

Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.

Most of the papers either praise or dismiss bitcoin movement. Very few study whether the system is unique and what makes it so..

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