The Blockchain Folk Theorem

Bruno Biais, Christophe Bisière, Matthieu Bouvard and Catherine Casamatta
Additional contact information
Matthieu Bouvard: McGill University

No 17-75, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.

Keywords: blockchain; forks; proof-of-work; distributed ledger; multiplicity of equilibria; coordination game (search for similar items in EconPapers)
JEL-codes: C73 G2 L86 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2017-12
New Economics Papers: this item is included in nep-gth, nep-mic, nep-ore and nep-pay
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: The Blockchain Folk Theorem (2019)
Working Paper: The blockchain folk theorem (2019)
Working Paper: The blockchain folk theorem (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1775

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