The Blockchain Folk Theorem

Blockchains are distributed ledgers, operated within peer-to-peer networks. We model the proof-of-work blockchain protocol as a stochastic game and analyze the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line wit...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2019-05, Vol.32 (5), p.1662-1715
Main Authors: Biais, Bruno, Bisière, Christophe, Bouvard, Matthieu, Casamatta, Catherine
Format: Article
Language:English
Subjects:
Business administration
Humanities and Social Sciences
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Blockchains are distributed ledgers, operated within peer-to-peer networks. We model the proof-of-work blockchain protocol as a stochastic game and analyze the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhy095