Bitcoin: An Impossibility Theorem for Proof-of-Work based Protocols

Jacob Leshno and Philipp Strack ()
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Jacob Leshno: University of Chicago Booth School of Business

No 2204R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Bitcoin's main innovation lies in allowing a decentralized system that relies on anonymous, profit driven miners who can freely join the system. We formalize these properties in three axioms: anonymity of miners, no incentives for miners to consolidate, and no incentive to assuming multiple fake identities. This novel axiomatic formalization allows us to characterize which other protocols are feasible: Every protocol with these properties must have the same reward scheme as Bitcoin. This implies an impossibility result for risk-averse miners: no protocol satisfies the aforementioned constraints simultaneously without giving miners a strict incentive to merge. Furthermore, any protocol either gives up on some degree of decentralization or its reward scheme is equivalent to Bitcoin's.

Keywords: Bitcoin; Random Selection; Proportional Selection Rule; Impossibility Theorem (search for similar items in EconPapers)
JEL-codes: C72 D02 D47 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2019-10, Revised 2019-11
New Economics Papers: this item is included in nep-mic, nep-ore and nep-pay
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Citations: View citations in EconPapers (1)

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Working Paper: Bitcoin: An Impossibility Theorem for Proof-of-Work based Protocols (2019)
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