Congestion can allow Blockchains to Finance their Infrastructure and is Vital to Bitcoin, According to New Research from Columbia Business School

NEW YORK, Oct. 3, 2017 /PRNewswire/ -- With its value more than tripling in price in the second quarter of 2017, Bitcoin has emerged as the most prominent cryptocurrency on the market.  Yet, while its value is surging, so too are Bitcoin's customer grievances, as users of the payment system are experiencing huge amounts of network congestion.

Common wisdom would suggest that Bitcoin would factitively be working to reduce consumer frustration by decreasing network congestion, but new research from Columbia Business School posits that some congestion may in fact be necessary.

In their new research paper, Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System, authors Gur Huberman, Jacob D. Leshno and Ciamac Moallemi, all professors at Columbia Business School, assert that congestion allows blockchain technology to raise the necessary revenue to fund its computer infrastructure.

"Without sufficient congestion there is little incentive for users to pay transaction fees," said Moallemi.  "Our results indicate that the relationship is quite sharp, unless users are forced to incur substantial congestion delays, the system cannot raise even small amounts of revenue." 

In fact, the authors suggest that the absence of sufficient congestion could be disastrous for the Bitcoin system. Presently, the infrastructure of the system is funded through a combination of newly minted coins and user transaction fees. However, as the newly minted are phased out, in a few years only transaction fees will remain as a revenue source. Without sufficient congestion, users will pay almost no transaction fees, generating almost no revenue to fund the network of computers executing the digital currency transactions. The same applies to other applications of blockchain technology.

The researchers propose several alternative design suggestions to enhance the system's stability and ensure its profitability, including:

• Creating smaller but more frequent transaction block sizes, counter to prevailing thinking;
• Dynamically adjusting network throughput to maintain a target level of congestion

About the Research
The research analyzes the economics underlying the distributed blockchain system. The analysis identifies a relationship between congestion and transaction fees, and concludes that congestion is essential for raising revenue from users to fund the network infrastructure of cryptocurrencies.

The paper explains the distinction between the economic structures of the distributed Bitcoin system and traditional electronic payment systems, such as Fed Wire, Swift, Visa, and PayPal. As opposed to traditional systems, the Bitcoin system does not have a controlling owner who can set fees. Instead, the operation of the Bitcoin protocol is determined by a computer protocol that sets the rules for the system. This protocol must ensure the system is trusted, and that it is properly funded.

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

About Columbia Business School
Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School's transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School's faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School's efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School's position at the very center of business, please visit www.gsb.columbia.edu.

SOURCE Columbia Business School

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