Working Paper: NBER ID: w24242
Authors: 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.
Keywords: Bitcoin; Mining; Market Structure; Resource Usage
JEL Codes: E42; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free entry (Z38) | resource usage (Q21) |
| regulating market structure (L10) | resource usage (Q21) |
| number of miners (L72) | resource usage (Q21) |
| number of miners (L72) | technological costs (O33) |
| number of miners (L72) | overall costs (J30) |
| computational difficulty (C63) | resource usage (Q21) |