The economic limits of cryptocurrencies and blockchains (QJE)

The Quarterly Journal of Economics (QJE) published a paper by Eric Budish that shows that Nakamoto’s form of trust is economically limited. A zero-profit condition on the quantity of honest blockchain “trust support” (work, stake, etc.) and an incentive-compatibility condition on the system’s security against majority attack together imply an equilibrium constraint which says that the “flow” cost of blockchain trust has to be large at all times relative to the benefits of attacking the system. This is extremely expensive relative to traditional forms of trust and scales linearly with the value of attack. However, the paper’s analysis is consistent with the continued use of cryptocurrencies and blockchains for black market purposes, and more generally in use cases where users are willing to pay the high implicit costs of anonymous, decentralized trust. [Read more at the QJE and see also McConnell (2017)]

To be clear, the Budish paper’s critique is of blockchains and permissionless consensus, not of distributed databases with trust grounded in traditional sources. (see Budish and Sunderam (2023) for discussion of the potential value of the blockchain data structure in the context of traditional finance).

Fostering empathy for Canadians facing challenges with digital payment systems (BOC)

The Bank of Canada (BOC) published a paper on designing inclusive and user-friendly digital payment systems, focusing on fostering empathy for and identifying the needs of users who exhibit behaviors that indicate they encounter accessibility or usability barriers in digital systems. Specifically, it examines two types of users based on two common behaviors: users who rely on others to perform tasks and those who avoid interacting with technology. The findings show that individuals in the two groups avoid systems they expect lack usability. Addressing these issues through standard accessibility practices, live assistance and thoughtful interface design can enhance user interaction and trust. For accessibility issues that cannot realistically be eliminated, technology that enhances cooperative relationships and allows account owners to control information sharing is key. [Read more at the BOC]

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