Incentive Mechanism and Economic Model of Blockchain Based Cryptocurrencies

By Engin Iyidogan (Imperial College Business School)

This paper develops a blockchain economic model in the presence of endogenously determined mining difficulty and proposed fee structure. The agents of the model, miners and users, reach an equilibrium under certain conditions. Increasing number of miners reduces the optimal transaction fee and mining cost per miner. Optimal transaction fee reduces with increasing technology. Mining cost also decreases with technology for large number of miners in the system, yet mining cost increases due to high competition for environment with the relatively small number of miners. As a result, social scalability of cryptocurrencies can be achieved under higher technology and with more decentralized network.

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