Cryptocurrency, Delivery Lag, and Double Spending History

Abstract

We develop a general equilibrium model of cryptocurrency to study the optimal design of a cryptocurrency system. Agents trade cryptocurrency using digital wallets, and the cryptocurrency system provides verification of a digital wallet's history of double spending attempts. Delaying the delivery of goods until payment information is confirmed in the blockchain prevents double spending. However, double spending can be prevented without a delivery lag under some conditions if a wallet has a good reputation in terms of its history of double spending attempts. In particular, as the difficulty of mining work rises, the incentive to engage in double spending with a good wallet decreases. We study the optimal design of the cryptocurrency system in terms of the difficulty of mining work and the supply of cryptocurrency and evaluate the welfare gain that would be captured if the current Bitcoin system adopted the optimal cryptocurrency system.

Money, Bitcoin, and Monetary Policy

“…15. If a buyer has something to lose from double-spending attempts, such as the good reputation of his/her digital wallet, as in Kang (2019), then the buyer may not have double-spending incentives without delivery lags. See Kang (2019) for more information.…”