The Blockchain Folk Theorem

Bruno Biais, Christophe Bisière, Matthieu Bouvard and Catherine Casamatta

The Review of Financial Studies, 2019, vol. 32, issue 5, 1662-1715

Abstract: Blockchains are distributed ledgers, operated within peer-to-peer networks. We model the proof-of-work blockchain protocol as a stochastic game and analyze 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.Received May 31, 2017; editorial decision July 6, 2018 by Editor Itay Goldstein.

Date: 2019
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Citations: View citations in EconPapers (133)

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Working Paper: The blockchain folk theorem (2019)
Working Paper: The Blockchain Folk Theorem (2017)
Working Paper: The blockchain folk theorem (2017)
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