Market Structure in Bitcoin Mining

June Ma, Joshua Gans and Rabee Tourky

No 24242, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the Bitcoin protocol for electronic peer-to-peer payments and the operations that support the “blockchain” that underpins it. It is shown that that protocol maps formally into a dynamic game that is an extension of standard models of R&D racing. The model provides a technical foundation for any economic analysis of ‘proof of work’ protocols. Using the model, we demonstrate that free entry is solely responsible for determining resource usage by the system for a given reward to mining. The endogenous level of computational difficulty built into the Bitcoin protocol does not mitigate this usage and serves only to determine the time taken to process transactions. Regulating market structure will mitigate resource use highlighting the importance of identifying the benefits of competition for the operation of the blockchain.

JEL-codes: E42 L1 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-com, nep-gth, nep-mac and nep-pay
Note: IO PR
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Citations: View citations in EconPapers (29)

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