Template-Type: ReDIF-Paper 1.0
Title: Blockchain Congestion Facilitates Currency Competition
Author-Name: Maxi Guennewig
Author-Email: mguennewig@uni-bonn.de

Classification-JEL: E40, E42, E5.
Keywords: Cryptocurrencies, currency competition, blockchain, inflation

Abstract: Blockchain capacity constraints induce congestion when many users want to transact at the
same time, challenging the usability of cryptocurrencies as money. This paper argues that
blockchain capacity constraints, coupled with the need to incentivize miners (validators) to
maintain blockchain security, lead to low inflation outcomes when cryptocurrencies compete
for user demand. If two coins are both used as medium of exchange, a low-inflation coin
must experience higher congestion than a high-inflation coin; otherwise demand for the latter
is zero. Coin issuers then strategically undercut each other’s money growth rates to boost
transaction demand, limiting the overall inflation rate of the economy. However, the equilibrium
is necessarily inefficient given unrealized gains from trade due to congestion and the cost of
maintaining blockchain security.

Note: 
Length: 45
Creation-Date: 2024-05
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp549
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_549