Decentralized Mining in Centralized Pools

Concentrating on the fall of the labor share

Lin Cong, Zhiguo He (), Jiasun Li and Wei Jiang

The Review of Financial Studies, 2021, vol. 34, issue 3, 1191-1235

Abstract: The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for blockchains: because of miners’ cross-pool diversification and pool managers’ endogenous fee setting, larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and grow more slowly. Instead, mining pools as a financial innovation escalate miners’ arms race and significantly increase the energy consumption of proof-of-work-based blockchains. Empirical evidence from Bitcoin mining supports our model’s predictions. The economic insights inform other consensus protocols and the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.

JEL-codes: D43 D81 G23 L11 L13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (48)

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Working Paper: Decentralized Mining in Centralized Pools (2019)
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