INTRODUCTION
Since the launch of Bitcoin in 2009, several hundred different ‘cryptocurrencies’ have been developed and become accepted for a wide variety of transactions in leading online commercial marketplaces and the ‘sharing economy’, as well as by more traditional retailers, manufacturers, and even by charities and political parties.
Bitcoin and its various counterparts have attracted significant scholarly attention due to their erratic valuation patterns, as well as their associations with international money laundering, Ponzi schemes, and the clandestine exchange of illicit goods and services across national boundaries. Such controversies linked to cryptocurrencies have prompted a spectrum of governance responses from central banks, governmental agencies, international organizations, and regulatory bodies across the globe. In addition to formal initiatives aimed at prohibiting Bitcoin, there have been diverse efforts to integrate aspects of blockchain technology—the decentralized infrastructure that underpins cryptocurrencies—into broader frameworks for the exchange, documentation, and dissemination of digital transactions. Blockchain technology is being harnessed to bolster and expand a variety of governance functions. The innovative nature and extensive reach of burgeoning blockchain-based initiatives have sparked both idealistic aspirations and dystopian apprehensions concerning the application of this emerging technology to Bitcoin and its potential ramifications.
Cryptocurrencies:
Our contemporary economic framework is significantly dependent on electronic payment methods. Transactions, like those in e-commerce, require the utilization of digital tokens. Within a digital currency framework, payment is represented merely as a sequence of binary code. This creates an issue since these binary sequences, like any form of digital documentation, can be duplicated and reused for transactions. In essence, a digital token can be forged by utilizing it multiple times, which leads to the problem commonly known as double spending.
Cryptocurrencies like Bitcoin advance the concept by eliminating the requirement for a reliable intermediary. They instead depend on a distributed system of validators, who may remain anonymous, to uphold and refresh the versions of the ledger. This process demands that there is agreement among the validators regarding the accurate documentation of transactions, allowing users to be confident in receiving and preserving their account balances. However, achieving this consensus ultimately relies on users refraining from spending their currency multiple times, and trusting the validators to correctly revise the ledger.
The Double Spending Problem
As highlighted in the earlier section, a cryptocurrency system, because of its digital format, faces the issue of double spending. To delve into this problem, this section formulates a partial equilibrium framework to examine the decisions regarding mining and double spending within a single payment period. By assuming the price and quantity of balances, the trade conditions, and the rewards for mining as constants, this fundamental model identifies the mining actions and the motivations of buyers to engage in double spending. In the following section, we will integrate this foundational framework into a comprehensive equilibrium monetary model for a thorough analysis.
Mining
Many individuals perceive crypto mining merely as a method for generating new coins. Nonetheless, crypto mining encompasses the validation of cryptocurrency transactions within a blockchain infrastructure and the integration of these transactions into a distributed ledger.
Most significantly, crypto mining acts as a safeguard against the possibility of double-spending digital currencies across a decentralized network.
Similar to traditional currencies, when a user makes a transaction with cryptocurrency, it necessitates an update to the digital ledger, involving a debit from one account and a credit to another. Nevertheless, the inherent issue with digital currencies is their susceptibility to manipulation on online platforms. Consequently, Bitcoin’s distributed ledger permits only authorized miners to update transactions on it. This responsibility endows miners with the crucial role of protecting the network against double-spending.
At the same time, fresh coins are produced as compensation for miners’ efforts in maintaining the security of the network. Due to the absence of a central governing body for distributed ledgers, the mining process becomes vital for transaction validation. As a result, miners are motivated to uphold the network’s integrity by engaging in transaction validation, which also enhances their likelihood of acquiring newly created coins.
To guarantee that only accredited crypto miners can engage in mining and validate transactions, a proof-of-work (PoW) consensus mechanism has been implemented. This PoW system also fortifies the network against potential external threats.