Market Structure in Bitcoin Mining

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 the 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, blockchain, racing, mining, competition, free entry

JEL Classification: L11, E42

Suggested Citation: Suggested Citation

Ma, June and Gans, Joshua S. and Tourky, Rabee, Market Structure in Bitcoin Mining (June 27, 2019). Rotman School of Management Working Paper No. 3103104, Available at SSRN: https://ssrn.com/abstract=3103104 or http://dx.doi.org/10.2139/ssrn.3103104