Working Paper: NBER ID: w25592
Authors: Lin William Cong; Zhiguo He; Jiasun Li
Abstract: The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.
Keywords: Decentralized mining; Centralized pools; Blockchain; Energy consumption
JEL Codes: D43; G2; G22; L13; L44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk-sharing benefits (G52) | increased incentives for miners to acquire more hash rates (E42) |
| increased incentives for miners to acquire more hash rates (E42) | intensified arms race (H56) |
| arms race among miners (L72) | increased energy consumption (Q41) |
| larger mining pools (L72) | higher fees (R48) |
| higher fees (R48) | slower growth rate (O49) |
| larger mining pools (L72) | slower growth rate (O49) |
| pool size (L25) | fees (M52) |
| pool size (L25) | growth rate (O40) |