Paper Number
1521
Paper Type
Complete
Description
The stability of proof-of-work consensus underlying decentralized networks such as Bitcoin relies on an incentive compatible mining design. While theoretically well studied, the empirical composition of the mining process remains largely opaque due to the un-known distribution of miners and technology. This paper proposes a model that leverages innovation-driven convergence in the Bitcoin ecosystem to reconstruct market conditions and study miners’ behavior. Numerical simulations using 10,000 bootstrap samples sup-port the implications of the model. The results quantify considerable variation in miners’ profits and costs and proof consistent with the proposed theory. The estimates suggest that the cost of a capacity majority, and thus the ability to successfully attack the network, can be astonishingly low (e.g., $2.13 million in May 2020) when adverse events coincide. This pronounces the relevance of cyclical patterns when assessing the immutability of proof-of-work consensus.
Recommended Citation
Stinner, Jona, "On the Economics of Bitcoin Mining: A Theoretical Framework and Simulation Evidence" (2022). ICIS 2022 Proceedings. 7.
https://aisel.aisnet.org/icis2022/blockchain/blockchain/7
On the Economics of Bitcoin Mining: A Theoretical Framework and Simulation Evidence
The stability of proof-of-work consensus underlying decentralized networks such as Bitcoin relies on an incentive compatible mining design. While theoretically well studied, the empirical composition of the mining process remains largely opaque due to the un-known distribution of miners and technology. This paper proposes a model that leverages innovation-driven convergence in the Bitcoin ecosystem to reconstruct market conditions and study miners’ behavior. Numerical simulations using 10,000 bootstrap samples sup-port the implications of the model. The results quantify considerable variation in miners’ profits and costs and proof consistent with the proposed theory. The estimates suggest that the cost of a capacity majority, and thus the ability to successfully attack the network, can be astonishingly low (e.g., $2.13 million in May 2020) when adverse events coincide. This pronounces the relevance of cyclical patterns when assessing the immutability of proof-of-work consensus.
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07-Blockchain