Economic Theory

Beyond Bitcoin: The Economics of Digital Currencies by Hanna Halaburda, Miklos Sarvary

By Hanna Halaburda, Miklos Sarvary

Digital currencies are a pretty new phenomenon led to by way of the dazzling upward thrust of the web. whereas Bitcoin is the main recognized, there are lots of different electronic currencies—from Amazon Coin to Zetacoin. Beyond Bitcoin explores the industrial forces underlying the layout in their gains and their strength. Halaburda and Sarvary argue that electronic currencies are most sensible understood by means of contemplating the commercial incentives using their creators and clients. The authors current a framework that may let systemic research of this dynamic surroundings and help additional dialogue of the layout of electronic currencies' beneficial properties and the contest within the market.

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Economists often use the following three-part definition of money: (1) unit of account, (2) medium of exchange, and (3) store of value. This definition means that two people can agree how much a good is worth in terms of money (that’s part 1); people accept the money when they are selling the good, because they believe it will be accepted elsewhere when they want to exchange it for a good they want to buy (part 2); and money will not lose its value drastically between the time people get it and the time they spend it to buy something else (part 3).

People are willing to use multiple currencies and bear the cost of compatibility and exchange if the currencies serve different purposes and if each is better for its purpose than others are. But people would rather use one currency for a given purpose: network effects matter for currencies. Network effects tilt the economy toward winner-take-all outcomes, where a single currency accounts for all transactions in the economy. In such cases, the incumbent currency may hinder competition, with inertia keeping people from adopting new (or multiple) currencies that could improve their well-being.

With network effects, we often see a “winner-take-all” dynamics. If two networks are similar but one is larger, the larger one will be more attractive to the new users. Users from the smaller network may also prefer to switch to the larger network. The larger will grow even larger, while the smaller may even disappear. Thus, the winner M e d i u m o f E x c h a n g e : E v e r - P r e s e n t C o m p e t i t i o n 39 takes the whole market. Often such a market is efficient, as all users may take advantage of maximal network effect.

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