Market Equilibria and Risk Diversification in Blockchain Mining Economies

Yun Kuen Cheung (), Stefanos Leonardos (), Shyam Sridhar () and Georgios Piliouras ()
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Yun Kuen Cheung: University of London
Stefanos Leonardos: King’s College London
Shyam Sridhar: Singapore University of Technology and Design
Georgios Piliouras: Singapore University of Technology and Design

A chapter in Mathematical Research for Blockchain Economy, 2023, pp 23-46 from Springer

Abstract: Abstract The success of blockchain-based applications, most notably cryptocurrencies, has brought the allocation of mining resources at the epicenter of academic and entrepreneurial attention. Critical for the stability of these markets is the question of how miners should adjust their allocations over time in response to changes in their environment and in other miners’ strategies. In this paper, we present a proportional response (PR) protocol that makes these adjustments for any risk profile of a miner. The protocol has low informational requirements and is particularly suitable for such distributed settings. When the environment is static, we formally show that the PR protocol attains stability by converging to the market equilibrium. For dynamic environments, we carry out an empirical study with actual data from four popular cryptocurrencies. We find that running the PR protocol with higher risk diversification is beneficial both to the market by curbing volatile re-allocations (and, thus, increasing market stability), and to individual miners by improving their profits after accounting for factor mobility (switching) costs.

Keywords: Blockchain mining; Market equilibria; Proportional response dynamics; Risk diversification; Factor mobility; Cryptocurrencies (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/978-3-031-18679-0_2

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