A Mean Field Games Model for Cryptocurrency Mining
A. Max Reppen and
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We propose a mean field game model to study the question of how centralization of reward and computational power occur in the Bitcoin-like cryptocurrencies. Miners compete against each other for mining rewards by increasing their computational power. This leads to a novel mean field game of jump intensity control, which we solve explicitly for miners maximizing exponential utility, and handle numerically in the case of miners with power utilities. We show that the heterogeneity of their initial wealth distribution leads to greater imbalance of the reward distribution, or a "rich get richer" effect. This concentration phenomenon is aggravated by a higher bitcoin price, and reduced by competition. Additionally, an advanced miner with cost advantages such as access to cheaper electricity, contributes a significant amount of computational power in equilibrium. Hence, cost efficiency can also result in the type of centralization seen among miners of cryptocurrencies.
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