Blockchain Economics

Joseph Abadi and Markus Brunnermeier

No 22-15, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The fundamental problem in digital record-keeping is establishing consensus on an update to a ledger, e.g., a payment. Consensus must be achieved in the presence of faults—situations in which some computers are offline or fail to function appropriately. Traditional centralized record-keeping systems rely on trust in a single entity to achieve consensus. Blockchains decentralize record-keeping, dispensing with the need for trust in a single entity, but some instead build a consensus based on the wasteful expenditure of computational resources (proof-of-work). An ideal method of consensus would be tolerant to faults, avoid the waste of computational resources, and be capable of implementing all individually rational transfers of value among agents. We prove a Blockchain Trilemma: any method of consensus, be it centralized or decentralized, must give up (i) fault-tolerance, (ii) resource-efficiency, or (iii) full transferability.

Keywords: Blockchain; Consensus; Cryptocurrency; Mechanism Design; Payments; FinTech (search for similar items in EconPapers)
JEL-codes: D80 E42 G00 (search for similar items in EconPapers)
Pages: 47
Date: 2022-05-03
New Economics Papers: this item is included in nep-des and nep-pay
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Related works:
Working Paper: Blockchain Economics (2019)
Working Paper: Blockchain Economics (2018)
Working Paper: Blockchain Economics (2018)
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DOI: 10.21799/frbp.wp.2022.15

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