[Lecture Series FS22] Economic Implications of Scaling Blockchains

Details

Prof. Fahad Saleh (Wake Forest University)

Abstract

Leading blockchains (e.g., Bitcoin and Ethereum) involve prohibitive transaction costs, and those costs serve as the primary impediment for their mainstream adoption. Conventional wisdom holds that increasing throughput (i.e., scaling blockchain) resolves the stated problem, but this paper establishes that the conventional wisdom is inaccurate for blockchains employing a Proof-of-Work protocol. More explicitly, for blockchains employing a Proof-of-Work protocol, we demonstrate that improvements in scale undermine security, and the reduction in security leads to lower adoption levels. In contrast, this paper also establishes that blockchains employing a Proof-of-Stake protocol do not face the referenced issue. In particular, for blockchains employing a Proof-of-Stake protocol, we demonstrate that an increase in scale enhances security, and the enhanced scale and security collectively imply an unambiguous increase in adoption levels.