Cryptocurrency | Blockchain | Bitcoin | Double Spending | Payment Systems | Economics of Cryptocurrencies PDF Download
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a disparate network of computer
How well can a cryptocurrency serve as a means of payment?
We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
Cryptocurrencies can be used to buy and sell things, and their potential to store and grow value has also caught the eye of many investors. There are thousands of different cryptocurrencies available today. Instead, owners hold cryptocurrency in a digital wallet and buy or sell through an online exchange.