Matthew Klier 1

DATA 510
Prof. Shaw
Paper

Economic Impacts of Blockchain

Bitcoin and cryptocurrency have certainly become well known due to the trading craze that has

taken place and the large amounts of money individuals have made. Currently, a single Bitcoin is valued

at just under $50,000 USD and a total market value of just about $1 Trillion USD (DeCambre, 2021).

These cryptocurrencies have seen precedented growth in their perceived value by the market, but this

has primarily come from individuals treating them like investments rather than a new form of secure

currency. As well, the part of these cryptocurrencies that makes them so special and secure, has more

uses than just being used for the creation of an alternative to physical cash and modern digital banking

(although those are major aspects). That part is the use of blockchain, or a digital ledger of transactions

that created, distributed, and duplicated across a network of computer systems, making the ledger itself

relatively immutable (Catalini & Gans, 2020). In 2008 authors under the pseudonym Satoshi Nakamoto,

released a paper detailing how the blockchain system could be used to create a secure cryptocurrency

and released bitcoin into the world (Aste, Tasca, & DiMatteo, 2017). Since then, cryptocurrency has

taken the world by storm and as such put blockchain at the forefront allowing for it to potentially grow

into other areas. But what are the economic impacts of cryptocurrency and blockchain and what

impacts could still be coming down the road? Blockchain has already begun to generate and create

consumer wealth as a store of value tool being regularly traded through cryptocurrency. It also has the

potential to lower costs for consumers and create more efficient business practices. These factors

suggest that used to its full potential, Blockchain could help create a large boost to the global economy,

but it does not come without its flaws and potential risks as well.

One of the major benefits often touted about blockchain and cryptocurrency is that it allows for

individuals to exchange their money digitally in the same way they could exchange cash on the street.
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Mainly meaning that they can make the exchange without the use of a third-party entity overseeing the

exchange. This third party is typically some central banking system which oversees, preforms, and

secures the transaction. For these services though, the third part often charges a fee for the transaction

applying a cost to the digital exchange of currency. The blockchain systems used by cryptocurrencies

such as bitcoin are able to do all these services automatically as part of the currency itself (Ertz & Boily,

2019). Eliminating the third party also eliminates outside control over the transaction, with no more

ability for a transaction to simply be canceled by the bank, no minimum transfer size requirement, and a

reduced risk for fraud (Ertz & Boily, 2019). In fact, security wise, the blockchain cryptocurrency system is

much more secure than typical digital currency transaction, as by eliminating the need for a third party it

also eliminates the need for the use of personal information in the transfer (Catalini & Gans, 2020).

While transferring money through a traditional source may require banking account information and

personal identification information, Bitcoin and the blockchain system just require the original owner of

the bitcoin to exchange his digital key to the other member of the transaction. The exchange will then

be recorded and finalized in the blockchain ledger without any third-party or anyone needing to access

either of the individuals’ personal information (Catalini & Gans, 2020). Viewed in this light, the

blockchain system has a competitive advantage over traditional digital monetary transaction systems

and provides a better and safer product at a cheaper price. This gives it the potential to disrupt some

traditional business models and decentralize market practices (Ertz & Boily, 2019). By lowering costs to

the consumer and providing a better more secure product we would expect to see an increase in

consumer transaction and spending activity.

To date, Bitcoin and other blockchain currencies have only begun to take hold as true forms of

“currency” usable for transactions and purchases. For many it is still viewed as a “Store of Value” and

treated more like investments than currency (Budish, 2018). As well, it may be easy to look at the

current system and see that the fees charged by third parties are often small and assume that this would
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mean Blockchain based currencies would likely have little impact. Viewing the larger picture though,

and understanding on the grand scale of things, the nearly limitless number of transactions that occur

allow these small fees to be built up and will prevent individuals from engaging in them. One area we

can see and measure this is with foreign currency exchange. In 2015, in just the UK alone individuals had

2.92 billion British Pounds worth of unused foreign currency or exchanged foreign currency from travel

abroad which they did not bother to get converted into spendable British Pounds once back in the UK

(Huckle, Bhattacharya, White, & Beloff, 2016). This is saying that the cost and fees of exchanging that

currency was not worth what they would ultimately be left with, resulting in nearly 3 billion Pounds

worth of being left in a useless state. This is where the ability to easily, securely, and freely (without a

middleman) to exchange through a blockchain system would immediately put money back into

consumers pockets and the economy and when you think about how that 3 billion Pound number may

grow when looked at globally, you see how large an impact the Blockchain system could be by just

improving one facet of our digital transactions system (Huckle, et al, 2016). It is even possible that in

countries with extreme cases of inflation, cryptocurrencies such as bitcoin could provide individuals with

a more effective way to keep the value of their assets (Catalini & Gans, 2020).

There is one are where we have seen some of these factors take hold, in illegal markets. Bitcoin

and other blockchain cryptocurrencies have provided a safe, easy, cheap, secure, and anonymous way

for individuals to pay for illegal goods and services (Aste, et al, 2017). Transactions regarding these

illegal products was already more difficult due to their illegality and the fact that now third-party central

banking authority would willingly engage in overseeing transactions regarding them. As such, finding a

third-party to do so illegally obviously came at a higher premium due to the risk. Blockchain currencies

eliminate the need for this party altogether and make the risk of such transactions considerably lower.

Unsurprisingly, Bitcoin has become a standard currency for illegal activity on the Dark Web as well as for

illegal gambling and has led to an increase in activity for both (Aste, et al, 2017). This helps to show that
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if Blockchain currency begin to take hold in the economy at large it would likely lead to a boost to

demand and the economy, as we have seen occur with illegal goods and services.

Blockchain can do more than simply create new currencies to ease the creation of transaction

processes, in fact it can likely be used to create more efficient business practices in general. Blockchain

does not simply need to be used for purely monetary purposes. It can be put to use in contracts,

agreements, information entry or consultation operations (Ertz & Boily, 2019). These improvements

could lead to savings by companies on labor, documentation and automation especially in industries

involving computers services and rental properties (Ertz & Boily, 2019). One easy way to think about

how Blockchain technologies could improve business efficiency is looking at how it could improve

Auditing practices. Having a trustworthy and immutable system that automatically could record and

keep record of all the transactions that a occur for a company provides them an easy way to verify the

reliability of their records. As well, rules could be encoded within the Blockchain system to enable an

automated review via audit software and the system could become a shared data repository with

regulators giving them the ability for on-demand and immediate monitoring (Aste, et al, 2017). As well,

blockchain can also be used to provide goods and services in its transactions. Blockchain systems

already exist that facilitate transactions of data storage, bandwidth, and electricity (Catalini & Gans,

2020). It would even be possible for songs and other media to be exchanged via links on a Blockchain

system, which would be a major upheaval of how we get our digital content today (Huckle, et al, 2016).

Currently when individuals purchase digital media, they do not truly own it but just get a license to view

the content through the service they purchased through. These licenses can be revoked, and services

can be shut down. But by using the Blockchain to make a transaction, the purchasers would truly own

their copy of the content and would not be subject to potentially losing their media collections. It would

also allow media creators an easier route to directly sell and release their songs and movies (Huckle, et

al, 2016). Through creating more efficient business practices and easier forms of transactions,
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Blockchain and those who take advantage of it, will lower the barrier of entry into businesses and create

a market that is more competitive (Catalni & Gans, 2020).

Blockchain technologies are not an all-perfect panacea and do have their fair share of potential

issues. The most talked about is the energy costs associated with Blockchain networks. Bitcoin currently

has a average electricity consumption of 1,000 GW per block or about $10,000 per block and a one block

is added on average every ten minutes. This is very expensive as currently the transfer system for bitcoin

consumes about 1% of the transferred value in electricity (Aste, et al, 2017). There are some ways to

potentially reduce the energy usage, but they would require reducing the value of transactions in the

blocks, increasing the time before a transaction is accepted, or reducing the anonymity of the process

(Aste, et al, 2017). As well, while touted as secure and trusted, the blockchain system is not 100%

secure. It would be possible for an individual or group of individuals to preform an attack on the

blockchain system to remove transactions from the blockchain by creating an alternative chain. In terms

of Bitcoin, this would allow an individual to spend their Bitcoin, then override the block that would have

their transactions on it, before it was added to the Blockchain, and instead add one on that does not

record the transaction. This would allow them to spend those Bitcoin again, or an infinite number of

times it they continued the process with each transaction. This type of attack does not allow for the

creation of new transactions but only the erasure of recent ones (Budish, 2018). While this is a potential

risk two major factors do help to mitigate the risk. The first is to perform such an attack the attacker

would need to have most of the computational power or in other terms 50% or more of the mining hash

power (Budish, 2018). While this seems unlikely even know, currently Bitcoin does have 45% of its hash

rate produced by only five distinct mining pools, so if such pooling of mining power continued an

individual with the ability to attack could arise (Aste, et al, 2017). The other factor preventing this would

be an attack on the system would eradiate the trust and the value of the system. For cryptocurrency if

the attack is large and known, which it would likely need to be to make it worth it because owning that
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much of the mining power would be expensive, it would potentially cause the value of the currency to

crash and eliminate the purpose of having committed the attack (Budish, 2018).

Blockchain has the potential to help grow and expand the economy. Creating easy, free, and

secure transactions systems will likely help to incentivize spending and put more money in consumers

pockets, as we have already seen with Bitcoin and illegal products and gambling. As well by creating

new efficiencies in business practices, blockchain could lower entry barriers to business and increase

competition in markets. While there are some concerns with regards to attacks and energy usage it

seems likely that these can be mitigated enough that the benefits will outweigh the risks. Currently, the

main downside for blockchain is that it is primarily viewed as a “Store of Value” asset through

cryptocurrency but as it takes a larger hold the potential for its impact is certainly large.
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References

Aste, T., Tasca, P., & Di Matteo, T. (2017). Blockchain Technologies: foreseeable impact on industry and

society.

Budish, E. (2018). The economic limits of bitcoin and the blockchain (No. w24717). National Bureau of

Economic Research.

Catalini, Christian, and Joshua S. Gans. "Some simple economics of the blockchain." Communications of

the ACM 63.7 (2020): 80-90.

DeCambre, M. (2021, February 19). Bitcoin market value tops $1 trillion for first time ever as crypto price

soars. Retrieved from https://www.marketwatch.com/story/bitcoin-market-value-tops-1-trillion-for-

first-time-ever-as-crypto-price-soars-11613751855

Ertz, M., & Boily, É. (2019). The rise of the digital economy: Thoughts on blockchain technology and

cryptocurrencies for the collaborative economy. International Journal of Innovation Studies, 3(4),

84-93.

Huckle, S., Bhattacharya, R., White, M., & Beloff, N. (2016). Internet of things, blockchain and shared

economy applications. Procedia computer science, 98, 461-466.