Bitcoin transaction fees and the decentralization of Bitcoin mining pools

Zhicheng Li, Jialong Li and Ke Zhou

Finance Research Letters, 2023, vol. 58, issue PB

Abstract: In this paper, we propose a novel mechanism for decentralizing Bitcoin mining pools: the uncertain mining reward resulting from Bitcoin transaction fees. We present a simple model to demonstrate that risk-averse Bitcoin miners are more likely to allocate their computational power across multiple mining pools when transaction fees make up a large fraction of the mining reward. Our empirical study shows a negative relatinship between the proportion of transaction fees and the decentralization of Bitcoin mining pools. Our study suggests that an active Bitcoin trading market or a decreasing fixed reward from mining would lead Bitcoin mining pools to be more decentralized.

Keywords: Bitcoin transaction fees; Mining pools; Decentralization; Hash rate allocation (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pb:s1544612323007195

DOI: 10.1016/j.frl.2023.104347

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