Title: The Economic Limits of Bitcoin and Anonymous, Decentralized Trust on the Blockchain (link to video-recording; link to slides)
Speaker: Eric Budish, Chicago Booth
Abstract: Satoshi Nakamoto invented a new form of trust. This paper presents a three equation argument that Nakamoto’s new form of trust, while undeniably ingenious, is extremely expensive: the recurring, 'flow' payments to the anonymous, decentralized compute power that maintains the trust must be large relative to the one-off, 'stock' benefits of attacking the trust. This result also implies that the cost of securing the trust grows linearly with the potential value of attack — e.g., securing against a $1 billion attack is 1000 times more expensive than securing against a $1 million attack. A way out of this flow-stock argument is if both (i) the compute power used to maintain the trust is non-repurposable, and (ii) a successful attack would cause the economic value of the trust to collapse. However, vulnerability to economic collapse is itself a serious problem, and the model points to specific collapse scenarios. The analysis thus suggests a 'pick your poison' economic critique of Bitcoin and its novel form of trust: it is either extremely expensive relative to its economic usefulness or vulnerable to sabotage and collapse.
Bio: Eric Budish is the Paul G. McDermott Professor of Economics and Entrepreneurship at the University of Chicago, Booth School of Business. He is also a Research Associate at the National Bureau of Economic Research, Co-Director of the Initiative on Global Markets at Chicago Booth, and the Krane Distinguished Visiting Professor at the University of Chicago Law School. Budish’s main area of research is market design, with specific topics studied including financial markets, matching markets, ticket markets, blockchains and cryptocurrencies, and incentives for innovation. His most recent research has concerned various aspects of the Covid-19 crisis, especially on how to use market design to accelerate global vaccination. Budish received his PhD in Business Economics from Harvard University, his MPhil in Economics from Oxford (Nuffield College), and his BA in Economics and Philosophy from Amherst College. Prior to graduate school, Budish was an analyst at Goldman Sachs. Budish’s honors include giving the 2017 AEA-AFA joint luncheon address, the Sloan Research Fellowship, and the Marshall Scholarship.