The decentralized nature of blockchains – the technology behind cryptocurrencies – is a large part of their appeal: there is no central authority, there are no intermediaries, and all participants contribute to maintaining the system. But as Chicago Booth’s Eric Budish argues, blockchains rely on ongoing financial incentives paid to providers of what he calls “trust support,” whether that’s performing computational work in the Bitcoin system or locking cryptocurrency as collateral in the Ethereum system. This arrangement amounts to paying security guards to protect a bank due to the lack of police or enforceable laws to deter thieves.
Budish’s model demonstrates that to maintain the trustworthiness of a growing blockchain, the rewards paid for supporting trust must also increase and always exceed what an attacker could earn. For example, if the value an attacker could steal increases a thousandfold, the cost of that trust support must also increase a thousandfold to maintain the security of the system, making blockchains expensive to operate and difficult to scale. To learn more about the importance of blockchain security, read “In Stablecoins We Trust? »
