The Bank of Finland has released a new paper on the economic analysis of the bitcoin payment system.

Authored by Gur Huberman, Jacob D. Leshno, and Ciamac Moallemi, the paper, in particular, explores how the bitcoin system raises revenue to pay for its infrastructure, how are usage fees determined, how much infrastructure is deployed, and the implications of changing parameters in the protocol. They said that the bitcoin system is a platform with two main constituencies: users and profit seeking miners who maintain the system’s infrastructure.

The paper states:

“Transaction fees are paid by users who wish to gain processing priority over other users and avoid delays. The system’s infrastructure is provided by miners, who compete and provide their services at cost. Our analysis identifies a relation between congestion and transaction fees…Congestion is essential for raising revenue from users to fund miners’ provision of infrastructure.”

The authors compare the economic structures of the distributed Bitcoin system with a traditional electronic payment systems operated by a monopolist. They noted that unlike traditional systems, bitcoin system does not require trust in any entity. However, they also highlighted certain limitations of the bitcoin system including irreversible transactions in case of error or fraud and users who lose the credentials to their account have no way of retrieving their balance.

“Bitcoin is a monopoly run by a protocol, not by a managing organization. Familiar monopolies are run by managing organizations with discretion to determine and then change prices, offerings and rules. Monopolies are often regulated to prevent or at least mitigate their abuse of power.”

They concluded saying:

“Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.”

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