University of Chicago's Bitcoin & Blockchain Economic Limits Report Recap


Although Bitcoin has the potential to replace traditional global financial systems, the inherent economy of cryptocurrencies might prevent them from becoming more important than it is now.

A New Economic Analysis Could Spoil The Party

Eric Budish, is a Professor of Economics at the University of Chicago and has been one of many scholars to whom the discussion about digital money has drawn attention; a discussion that has so far been dominated by both libertarians and computer experts. The fact is that there is a growing popularity of cryptocurrencies in all sectors.

Pr. Budish, in one of his new academic papers, devoted himself to analyzing the Bitcoin incentive system (BTC). He concluded that there are economic limits intrinsic to the economic importance of cryptocurrencies today.

The publication appeared for the first time in a newsletter in the ‘Chain Letter’ section of the MIT Technology Review’s blockchain and cryptocurrencies section.

Hypothetically speaking, if there was an open gold mine in front of our houses, who would be able to resist the temptation to go and extract some? It should also be added that there is always a sly one who will want to take more gold than the others. All right, Budish’s thesis puts forward something similar. The professor in his article explains that if BTC gets close to the value of gold, people will go crazy and attack the network, just to make a profit.

In the current context and taking into account both markets, we have to say that Bitcoin’s stock market capitalization during the last year has oscillated between 100,000 and 200,000 million dollars. While gold stocks are worth about 7.5 trillion dollars. So Bitcoin is still not even close to being considered as economically important as gold. And according to Professor Budish, it never will be. That’s because if it ever gets too big, Bitcoin’s design genius would be its downfall.

Security Is The Most Expensive Thing

As such, Bitcoin’s security stems from competition between the members of the blockchain network, i.e. the miners. Every miner looks for opportunities to add new transactions to the blockchain and earn bitcoins (or other cryptos) in return. So, miners use large amounts of computing power in a race to solve a complicated mathematical problems.

So an attacker could not defeat the platform unless he could coordinate enough computing power to overwhelm the network and manipulate the transaction log. So that I could spend the same bitcoins repeatedly. This type of attack is called a “majority attack”. This would be the biggest threat to the Bitcoin network and for now mining coins is more profitable than trying to overthrow the network. Which makes the network secure.

Taking all of the above into account and recalling that the Bitcoin network uses almost as much energy as Ireland to operate, Budish now argues that the type of protection that the network now uses is very expensive.

Although Bitcoin can increase its value/price almost to infinity, which may be mathematically demonstrable, it also happens that security in blockchain can only increase linearly. That is, as more mining power is added to the network.

This is contrary to other forms of security, such as that used by the cryptographic platform in traditional financial systems, which when adding a lock to a door can add protection at a relatively low cost.

A Theft Equivalent to the Loss of Profits from Theft

The cost of running the Bitcoin blockchain currently stands at $100,000 every 10 minutes. While the cost of attacking the system is between $1.5 and $2 billion, estimates Budish. This makes the attack a great reason not to try. An attack of this magnitude is so expensive because Bitcoin mining is currently dominated by ASIC chips, built especially for mining and cannot be redistributed to perform other tasks.

Is this reason enough to deter someone from simply not trying to sabotage or attack the network?

Budish’s article has received a great deal of praise from economists and other scholars alike. On the other hand, a lot of cryptocurrencies enthusiasts don’t see it that way.

Ari Paul, co-founder of BlockTower Capital, says that everything Budish argues may well be true, as Bitcoin’s viability is limited. But that the plan to deter a bad actor from sabotage like that is inconsistent and extremely expensive.

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