The blockchain folk theorem

Bruno Biais, Christophe Bisière, Matthieu Bouvard () and Catherine Casamatta
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Matthieu Bouvard: TSM - Toulouse School of Management Research - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse

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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

Keywords: Nash equilibrium; Markov processes; Peer-to-peer architecture (Computer networks); Blockchains (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (115)

Published in Review of Financial Studies, 2019, 32 (5), pp.1662-1715. ⟨10.1093/rfs/hhy095⟩

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Related works:
Journal Article: The Blockchain Folk Theorem (2019)
Working Paper: The blockchain folk theorem (2018)
Working Paper: The Blockchain Folk Theorem (2017)
Working Paper: The blockchain folk theorem (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02281914

DOI: 10.1093/rfs/hhy095

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