Cryptocurrencies have been attracting attention from industry, academia, and the general public. This paper focuses on Bitcoin as a precedent, and analyses the economic model of a virtual currency system that features transaction fees set by users.
Bitcoin systems need a lot of “crowding” to grow their revenue and get the underlying capital, otherwise, they will be in danger of collapse in the long run. Also, the current system design specifically, processing large, infrequent trading block is not very efficient at increasing revenue.
Virtual currency is a digital currency stored in an open and decentralized electronic payment system. Since Naka moto (2008), virtual currency has been attracting attention from industry, academia, and the general public, of which Bitcoin is the most famous. Many of the hundreds of virtual currencies operate on large, reliable, decentralized computer networks.
It is the innovative design by computer science called blockchain that enables the rise of this virtual currency. Blockchains enable the creation of reliable, decentralized electronic payment systems as a whole, but not the individual servers in the system are trusted. The design of this new blockchain is a combination of cryptographic technology and incentives based on game theory. These incentives will be of interest to economists, especially those who focus on market design.
The conventional electronic payment system is owned and operated by each organization. Each organization decides the rules of the system and changes the rules according to changing circumstances. If you are interested in bitcoin trading, start today with bitcoineras.com
The operating organization is responsible for ensuring system reliability and maintaining the necessary system infrastructure. The operating organization also determines how and how much the participants will pay for the system.
Therefore, these organizations are often regulated or wholly owned by government agencies to mitigate the welfare losses associated with their monopoly status.
The innovative design of the blockchain in Bitcoin is that the electronic payment system can be operated without an operating organization. Rather, the protocol sets the rules of the system, and all components follow this rule.
There is no organization that takes the lead in maintaining the foundation. Instead, the base of Bitcoin consists of multiple computer servers called miners. Miners are aware of profit-making opportunities and are free to enter and leave the system. Any computer with sufficient memory and processing power and connected to the Internet can act as a miner.
Participating miners are required to perform computational work and are rewarded for their contribution to the system. Miners follow the rules of the protocol to their advantage. If other miners think they will follow the protocol, doing so will maximize their expected returns. Therefore, it is difficult to change the protocol. It cannot be changed without the consent of all.
The two main components that makeup Bitcoin are the users who hold the balance and make electronic transactions and the miners who maintain the foundation of the system.
A brief description of the system is as follows. The coin owner sends a message indicating the details of the transaction to be settled. Each transaction is a cryptographically verified message. Miners carefully examine the legitimacy of newly received transactions miners check syntax rules, ownership, double payment, etc. and block newly received transactions.
Put together. Each miner keeps a ledger blockchain of all past transactions. In this ledger, multiple transactions are grouped into blocks. The Bitcoin system randomly selects one miner every 10 minutes on average, and the block of trades gathered by the miner is connected to a ledger, and all the transactions contained in this block are processed.
To participate in this selection process, miners must perform a computational task called Proof of Work. The probability of being selected is proportional to the amount of computational work by the miner.
Equilibrium of countless small miners ensures that all miners agree and only legitimate transactions are processed. Bit coin’s protocol limits the block size to 1 MB, which limits the number of transactions in a block. As a result, the throughput of the system the number of transactions that can be processed per fixed time is limited but is not affected by the number of miners.