Bitcoin Blackout: Proof-of-Work and the Risks of Mining Centralization

Stefan Scharnowski and Yanghua Shi
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Stefan Scharnowski: University of Mannheim
Yanghua Shi: International University of Japan

No EMS_2026_08, Working Papers from Research Institute, International University of Japan

Abstract: Miners of proof-of-work networks like Bitcoin tend to gravitate towards countries with cheap energy. We analyze risks associated with this geographical centralization by exploiting a local electricity supply shock. Compared to a control group consisting of an energy-efficient proof-of-stake cryptocurrency, the blockchain fs capacity for transactions decreases while transaction fees widen substantially. The increased settlement latency on the blockchain also reduces secondary market quality as seen in higher exchange rate volatility, lower liquidity, and larger price differences between exchanges. Overall, our results suggest that geographical centralization poses short-lived, but potentially severe system-wide risks to proof-of-work networks.

Keywords: Bitcoin; blockchain; proof-of-work; proof-of-stake; mining; centralization (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 Q40 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2026-06
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