Optimal mining in proof-of-work blockchain protocols

Jorge Soria, Jorge Moya and Amin Mohazab

Finance Research Letters, 2023, vol. 53, issue C

Abstract: This paper examines the economic mechanism of cryptocurrency mining. By presenting a profit function, a maximization equilibrium is obtained. The model provides a formal approach to the demand for hashing power as a function of revenues, mining costs and the number of miners. We consider how the equilibrium is affected by passive miners. We use these results to introduce a formulation of the price elasticity of the demand for hashing power with respect to the cost of energy. The model is simulated using Reinforcement Learning algorithms that arrive to similar equilibrium results. The article concludes with implications of the model for policymaking.

Keywords: Cryptocurrencies; Mining; Machine learning; Elasticity; Hashrate; Proof-of-work (search for similar items in EconPapers)
JEL-codes: D24 D47 G14 G17 G29 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007863

DOI: 10.1016/j.frl.2022.103610

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