Economic Implications of Scaling Blockchains

Fahad Saleh, Kose John, Thomas Rivera , - May 24, 2022

We compare the economic implications of scaling blockchains under the Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus protocols. We study an economic model whereby agents store wealth on the blockchain and pay fees to expedite their transactions while a malicious agent attempts to compromise the blockchain’s security. Improved scaling alleviates congestion, leading to a decrease in equilibrium fees. Under a PoW protocol, this effect lowers the equilibrium expenditure on mining and therefore the security of the PoW blockchain. In contrast, scaling has the opposite effect for the PoS protocol since alleviating congestion increases cryptocurrency demand which improves PoS blockchain security.

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Blockchain proof-of-stake proof-of-work consensus protocols