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The blockchain folk theorem

Bruno Biais (), Christophe Bisière (), Matthieu Bouvard and Catherine Casamatta

No 17-817, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse 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: blockchain; forks; proof-of-work; distributed ledger; multiplicity of equilibria; coordination game (search for similar items in EconPapers)
JEL-codes: C73 G2 L86 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-pay
Date: 2017-05, Revised 2018-01
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: The Blockchain Folk Theorem (2019) Downloads
Working Paper: The blockchain folk theorem (2019)
Working Paper: The Blockchain Folk Theorem (2017) Downloads
Working Paper: The blockchain folk theorem (2017) Downloads
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