More (or Less) Economic Limits of the Blockchain

TL;DR

This paper extends blockchain sustainability analysis to proof of stake and permissioned networks, showing similar costs across mechanisms and limited cost savings from permissioning.

Contribution

It generalizes the economic limits of blockchain to new consensus mechanisms and network types, revealing cost equivalences and limitations of permissioned networks.

Findings

Economic sustainability involves similar costs for proof of work and proof of stake.

Permissioned networks do not reduce costs compared to permissionless networks.

Cost savings in permissioned networks are achievable through reward adjustments, not network permissioning.

Abstract

This paper extends the blockchain sustainability framework of Budish (2018) to consider proof of stake (in addition to proof of work) consensus mechanisms and permissioned (where the number of nodes are fixed) networks. It is demonstrated that an economically sustainable network will involve the same cost regardless of whether it is proof of work or proof of stake although in the later the cost will take the form of illiquid financial resources. In addition, it is shown that regulating the number of nodes (as in a permissioned network) does not lead to additional cost savings that cannot otherwise be achieved via a setting of block rewards in a permissionless (i.e., free entry) network. This suggests that permissioned networks will not be able to economize on costs relative to permissionless networks.