In the latest Stigler Center working paper, Chicago Booth’s Eric Budish argues that game-theoretic constraints imply there are “intrinsic economic limits to how economically important [Bitcoin] can become.” In this review essay, W. Scott Stornettaa co-inventor of the early blockchainhighlights the paper’s contributions while raising some exceptions with its broader generalizations.



Eric Budish’s new paper is a nice opening salvo in what we hope will be a series of papers to explore the game-theoretic constraints that different configurations of the blockchain impose on cryptocurrencies. It is focused on the currently most prominent species in the cryptocurrency family, namely Speculatatus nakamotus (Bitcoin).


Bitcoin((Bitcoin: A peer-to-peer electronic cash system. Satoshi Nakamoto. October 2008.)) has burst upon the public consciousness in part because it suggests that there can be a new kind of money, based not on the dictates of a sovereign government, or reliance on a precious metal, but on mathematical principles and computers: digital money! Its allure in the public mind has been further fueled by the Midas touch—ordinary people across the globe, possessed of nothing more than a personal computer and an Internet connection, seem to have become millionaires simply by getting in early on this bandwagon. Short of adding sex to the mix, it’s hard to think of something more likely to attract the public’s attention.


Budish systematically considers the underpinnings of Bitcoin to place constraints on this seemingly free-lunch dream. His conclusion is that there are built-in, inherent limitations to Bitcoin and similar cryptocurrencies that suggest they will never constitute a significant part of the global monetary system.


Your humble reviewer will handle this assignment in two parts. First, we’ll outline and then weigh in on the author’s key arguments. Then we’ll attend to the broader significance of the work.


The author’s first constraint is one imposed by the cost of mining. In a brilliant metaphor worthy of the best advertising agencies, the author(s) of Bitcoin chose to give the name of “mining” to an incentive for participation via the creation of a stake in the value of the overall system. By calling this process mining, it creates the impression of a digital analog to the mining of precious metals such as silver and gold, which have a long history of association with money and striking it rich. Hence it helps to legitimize the notion that Bitcoin is a kind of digital commodity-based money. Technical details aside, it is sufficient for this review to know that mining creates a need to perform a calculation that is deliberately compute-intensive, but serves no intrinsic purpose other than to decide who amongst the system’s users gets to claim an additional monetary stake in the system. Its negative consequence—and a very significant one it is—is that it creates an escalating arms race among miners for using enormous amounts of computing power. The amount of computing power devoted to this intrinsically wasteful effort is so great that it begins to raise environmental concerns on a global scale for the amount of electricity it consumes.(( It also has fed much of the speculation in Bitcoin, the sort that has led Warren Buffett to declare Bitcoin and its ilk “rat-poison squared.”((


Budish’s second constraint is related to so-called 51-percent attacks (and other related attacks), where a collusion between miners possessing even a slight majority of the computing power can game the system to their benefit and the detriment of the non-colluding holders of Bitcoin “currency.”


Third, and finally, Budish combines the previous two constraints to suggest an equilibrium condition. It is this combining which leads to the author’s suggestion that “there are intrinsic economic limits to how economically important [Bitcoin] can become in the first place.”


We have little to quibble with concerning the basic arguments of the first two constraints, other than to note that (1) this is well-trod ground, as the author acknowledges, and (2) there are even more attacks that the author has not considered (see footnote).((See much of the work discussed on Emin Gün Sirer’s blog, Hacking Distributed, In particular, see the disussion of “selfish mining” at


One particularly interesting notion relating to Budish’s constraint equation (2) has to do with shorting Bitcoin currency. In this regard, the cryptocurrency behaves much like a shorted equity. Shorting not only can depress a stock price, it can lead to highly volatile situations (short squeezes and the like). What is uniquely pernicious, however, about shorting Bitcoin currency is that it increases the attractiveness and economic incentives to computationally sabotage the value. So, even if we aren’t talking about “rat-poison squared,” this could make for volatility squared. Those hoping for a smooth ride of gradually appreciating value of Bitcoin are in for some bumps in the road. While these concerns are oft-discussed in the professional investment community, for “retail” investors in Bitcoin, Budish raises an important warning.


More generally, the author’s larger contribution lies in casting the two core constraints in more formal terms suitable to game-theoretic economic analysis, as well as combining them to create the equilibrium condition, which underscores the supposedly self-limiting economic importance of Bitcoin and similar systems.


Those hoping for a smooth ride of gradually appreciating value of Bitcoin are in for some bumps in the road. While these concerns are oft-discussed in the professional investment community, for “retail” investors in Bitcoin, Budish raises an important warning.

That’s a pretty big concern being raised. After all, many, many of the cryptocurrencies today follow this same mining model, and it is the mining in a winner-take-all competition that leads to the limitations he cites. That is a powerful and provocative prediction indeed.


So is this the end for the cryptocurrency gravy train? In a word, no. We must take exception with some of the generalizations Budish suggests: First, that the Bitcoin protocol and simple variations on it are the essence of an “anonymous decentralized trust blockchain.” And second “that the security of the blockchain actually relies on its use of scarce, non-repurposable technology.”


In fact, in the broadest sense, neither of these notions is justified. But to understand why we must briefly address two questions. First, what is the blockchain, and second, what is money/currency?


First, what is the blockchain? The blockchain is an immutable((The immutability is of course subject to the condition of the underlying hash functions themselves being “collision-resistant.” Were collisions to become easy, the ledger could in fact by modified. See, for example, ledger—a record of dealing that can be added to, record by record, but on which no erasures can be performed. The first blockchain open to the public and capable of handling anonymous (by which the author means non-trusted user) transactions in a way that all verification and possibility of manipulation is decentralized began operating in the mid-1990s (and, for that matter, continues to this day).(( Note that this precedes the publication of the Nakamoto/Bitcoin paper by more than a decade, and is hence clearly not subject to the peculiarities of the Bitcoin implementation of the blockchain. In particular, while this review is not the proper place to go into the technical details, we note that such blockchains do not require mining and are not subject to 51-percent attacks, while allowing “anonymous, decentralized trust” ledgers.


Second, what is money? Perhaps the simplest definition of money comes from a piece on an interview with Federal Reserve Bank of St. Louis Vice President and Research Director David Andolfatto:((((


Perhaps most surprising was Andolfatto’s assertion that the Bitcoin network is similar to the Federal Reserve, but he elaborated at length on the subject and why he believes all money is just a ledger. [Emphasis mine.]


In this context, he explained that all money attempts to perform a simple function, debiting an account and crediting another.

While Andolfatto may be the most recent prominent figure to contend that all money is just a ledger, he is far from the first.((Those interested may wish to consider Felix Martin’s Money, the Unauthorized Biography (Alfred A. Knopf, 2014) for an historical survey of both money and theories on its fundamental nature. The book, though academic in nature, is still accessible to the general reader.)) With these two definitions in place, we combine them to realize that money can be built on an anonymous decentralized ledger which neither requires mining nor is subject to 51-percent and related attacks.


The confusion of many on this point is likely related to the assumption that without the mining aspect of the Nakamoto blockchain, one cannot have a currency. This problem is further compounded by the lingering sense that one cannot have a currency without some commodity, such as gold or silver, somehow connected with it. Of course, fiat currencies are prima facie denials of the latter, while the rise of blockchains which do not require mining or seek to minimize it are refutations of the former.((In addition to the simplest example given herein, readers should be aware of the enormous amount of research and implementation activity in the blockchain space on minimizing the very valid concerns the author raises. For example, one should consider the works of and as among the most prominent examples of work already being done to mitigate the issues raised in this paper. In addition, offers an interesting example of a radical alternative to proof of work.))


Given these limitations, why is your reviewer so interested in this paper? Because this is just the type of analysis that should be applied to the growing body of blockchains, including non-Bitcoin-style blockchains. Economists often lament that the dismal science is an observational one, wherein they cannot perform large-scale experiments at will. They can rarely perform double-blind, controlled experiments of their choosing outside of small-scale studies.(( (It is akin to the situation with astrophysicists, who, for safety reasons, are not allowed to collide two neutron stars in the lab, but must patiently wait for such a rare event to occur somewhere else in the universe.)


Schumpeter’s creative destruction is alive and well here, giving us all, economist and layperson alike, a ring-side seat at the rebirth of money.

But the next best thing is at hand. Namely, there is currently underway a veritable Cambrian explosion of blockchain-based large-scale experiments on new species of specie. It is as if everybody and their dog((,_nobody_knows_you%27re_a_dog)) gets to play at being their own Federal Reserve. What is needed is someone with a background such as Budish’s to acquaint themselves with this cornucopia of opportunities and analyze them in a credible game-theoretic sense.


So what’s the bottom line? Does the author’s result put in question the viability of Bitcoin and other cryptocurrencies becoming a dominant force? Well, yes. Unless and until those of his concerns that are legitimate are addressed. But then again, no. Because these very concerns have driven the rapid pace of innovation in this community. Schumpeter’s creative destruction is alive and well here, giving us all, economist and layperson alike, a ring-side seat at the rebirth of money.


We look forward to the author’s next paper.


W. Scott Stornetta, Ph.D. (along with his colleague Stuart Haber, Ph.D.) is widely credited as the co-inventor of the early blockchain).(( He currently serves as Chief Scientist at First Digital Capital, an international blockchain investment firm. The reviewer wishes to thank Stuart Haber for discussions on this article.


Editors’ note: For further information, view this 2017 Stigler Center mini-course with David Yermack on Blockchains and the Future of Finance:



Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.