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Market Structure in Bitcoin Mining

Author

Listed:
  • June Ma
  • Joshua S. Gans
  • Rabee Tourky
Abstract
We analyze the Bitcoin protocol for electronic peer-to-peer payments and the operations that support the “blockchain” that underpins it. It is shown that that protocol maps formally into a dynamic game that is an extension of standard models of R&D racing. The model provides a technical foundation for any economic analysis of ‘proof of work’ protocols. Using the model, we demonstrate that free entry is solely responsible for determining resource usage by the system for a given reward to mining. The endogenous level of computational difficulty built into the Bitcoin protocol does not mitigate this usage and serves only to determine the time taken to process transactions. Regulating market structure will mitigate resource use highlighting the importance of identifying the benefits of competition for the operation of the blockchain.

Suggested Citation

  • June Ma & Joshua S. Gans & Rabee Tourky, 2018. "Market Structure in Bitcoin Mining," NBER Working Papers 24242, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24242
    Note: IO PR
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    Citations

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    Cited by:

    1. Joshua S. Gans & Hanna Halaburda, 2023. ""Zero Cost'' Majority Attacks on Permissionless Blockchains," NBER Working Papers 31473, National Bureau of Economic Research, Inc.
    2. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    3. Nick Arnosti & S. Matthew Weinberg, 2022. "Bitcoin: A Natural Oligopoly," Management Science, INFORMS, vol. 68(7), pages 4755-4771, July.
    4. Yen, Kuang-Chieh & Cheng, Hui-Pei, 2021. "Economic policy uncertainty and cryptocurrency volatility," Finance Research Letters, Elsevier, vol. 38(C).
    5. Lin William Cong & Zhiguo He & Jiasun Li & Wei Jiang, 2021. "Decentralized Mining in Centralized Pools [Concentrating on the fall of the labor share]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1191-1235.
    6. Joseph Abadi & Markus Brunnermeier, 2018. "Blockchain Economics," NBER Working Papers 25407, National Bureau of Economic Research, Inc.
    7. Daniel Ferreira & Jin Li & Radoslawa Nikolowa, 2019. "Corporate Capture of Blockchain Governance," Working Papers 880, Queen Mary University of London, School of Economics and Finance.
    8. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    9. Ferreira, Daniel & Li, Jin & Nikolowa, Radoslawa, 2023. "Corporate capture of blockchain governance," LSE Research Online Documents on Economics 115618, London School of Economics and Political Science, LSE Library.
    10. Jens Gudmundsson & Jens Leth Hougaard, 2020. "Enabling reciprocity through blockchain design," IFRO Working Paper 2020/14, University of Copenhagen, Department of Food and Resource Economics, revised 09 Feb 2021.
    11. Borri, Nicola & Shakhnov, Kirill, 2023. "Cryptomarket discounts," Journal of International Money and Finance, Elsevier, vol. 139(C).
    12. Charles Hoffreumon & Nicolas van Zeebroeck, 2018. "Forecasting short-term transaction fees on a smart contracts platform," Working Papers TIMES² 2018-028, ULB -- Universite Libre de Bruxelles.
    13. Gandal, Neil & Gans, Joshua, 2019. "More (or Less) Economic Limits of the Blockchain," CEPR Discussion Papers 14154, C.E.P.R. Discussion Papers.
    14. Canidio, Andrea, 2018. "Financial incentives for open source development: the case of Blockchain," MPRA Paper 85352, University Library of Munich, Germany.
    15. Borri, Nicola, 2019. "Conditional tail-risk in cryptocurrency markets," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 1-19.
    16. Cheng, Hui-Pei & Yen, Kuang-Chieh, 2020. "The relationship between the economic policy uncertainty and the cryptocurrency market," Finance Research Letters, Elsevier, vol. 35(C).
    17. Dimitrios Koutmos & Wang Chun Wei, 2023. "Nowcasting bitcoin’s crash risk with order imbalance," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 125-154, July.
    18. Karau, Sören, 2021. "Monetary policy and Bitcoin," Discussion Papers 41/2021, Deutsche Bundesbank.
    19. Ebers, Axel & Thomsen, Stephan L., 2021. "How do warnings affect retail demand for Bitcoin? Evidence from an international survey experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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