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We argue that the concentrated production and ownership of Bitcoin mining hardware arise naturally from the economic incentives of Bitcoin mining. We model Bitcoin mining as a two-stage competition; miners compete in prices to sell hardware while competing in quantities for mining rewards. We characterize equilibria in our model and show that small asymmetries in operational costs result in highly concentrated ownership of mining equipment. We further show that production of mining equipment will be dominated by the miner with the most efficient hardware, who will sell hardware to competitors while possibly also using it to mine. This paper was accepted by Kay Giesecke, finance.
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The Tragedy of the Miners
In a network of mining pools that secure Bitcoin-like blockchains, it is known that a self-interested mining pool can dishonestly siphon off another pool’s mining rewards by executing a block withholding (BWH) attack. In this paper, we show that a BWH attack is always unprofitable for an initial startup period which is at least one difficulty retarget interval (approximately 14 days for Bitcoin). Furthermore, we prove that the payback period to recoup this initial startup cost is always at least as long as the initial unprofitable startup interval, and we show numerically that it can be substantially longer. Thus, the decision of whether or not to execute a BWH attack is not a dominant strategy, and the so called Miner’s Dilemma is not in fact a dilemma.
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- PAR ID:
- 10322175
- Date Published:
- Journal Name:
- 2022 IEEE 19th Annual Consumer Communications Networking Conference (CCNC)
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Conference Paper:
- https://doi.org/10.1109/CCNC49033.2022.9700705
