Research School of Economics
Canberra, ACT, 0200
Institutional Affiliation: Australian National University
NBER Working Papers and Publications
|January 2018||Market Structure in Bitcoin Mining|
with June Ma, Joshua S. Gans: w24242
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 competi...