Limit as to how important cryptocurrencies can become – report
There are limits as to how important cryptocurrencies can become in the world’s economic system, according to new research from the University of Chicago.
Professor of Economics Eric Budish says that based on Bitcoin’s incentive system for ‘mining’ new coins, there are “intrinsic economic limits to how economically important it can become”.
In his report, The Economic Limits of Bitcoin and the Blockchain, Budish says the more valuable Bitcoin and similar digital currencies become, the more tempting they are to digital hackers.
He says the system’s vulnerability to a ‘majority attack’, namely that the computational costs of such an attack, must exceed the benefits.
But while the cost of hacking – or simply sabotaging – the Bitcoin blockchain is currently not viable, it could well become so.
“The model suggests that Bitcoin would be majority attacked if it became sufficiently economically important – eg, if it became a ‘store of value’ akin to gold – which suggests there are intrinsic economic limits to how economically important it can become in the first place,” writes Budish.
A review of his paper by MIT Technology Review says protecting the Bitcoin blockchain is extremely expensive.
And while Bitcoin’s value could theoretically increase almost without end, the blockchain’s security can only increase linearly, as more mining power is added to the network – creating a fundamental security flaw.
While Budish’s paper has been well received by academics, it has been heavily criticized in web forums.
However, the Review quotes Joshua Gans, an economist at the University of Toronto, as saying the online discussions “lacked scientific rigour”. Economists are just beginning to discuss these issues, and the research community will benefit from Budish’s “rigorous work of putting this all together”, he says.