Bitcoin Mining as a Contest

Authors

  • Nicola Dimitri University of Siena

DOI:

https://doi.org/10.5195/ledger.2017.96

Keywords:

Bitcoin mining, Game Theory, Nash Equilibrium

Abstract

This paper presents a simple game theoretic framework, assuming complete information, to model Bitcoin mining activity. It does so by formalizing the activity as an all-pay contest: a competition where participants contend with each other to win a prize by investing in computational power, and victory is probabilistic. With at least two active miners, the unique pure strategy Nash equilibrium of the game suggests the following interesting insights on the motivation for being a miner: while the optimal amount of energy consumption depends also on the reward for solving the puzzle, as long as the reward is positive the decision to be an active miner depends only on the mining costs. Moreover, the intrinsic structure of the mining activity seems to prevent the formation of a monopoly, because in an equilibrium with two miners, both of them will have positive expected profits for any level of the opponent’s costs. A monopoly could only form if the rate of return on investment were higher outside bitcoin.  

Author Biography

Nicola Dimitri, University of Siena

Full Professor of Economics 

University of Siena

Italy

References

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Rizun, P. “A Transaction Fee Market Exists Without a Block Size Limit.” Block Size Limit Debate Working Paper (2015) https://www.bitcoinunlimited.info/resources/feemarket.pdf

Houy, N. “The Bitcoin mining game.” Ledger 1 53-68 (2016) https://doi.org/10.5195/ledger.2016.13

Konrad, K. Strategy and Dynamics in Contests. Oxford: Oxford University Press (2009)

Vojonovic, M. Contest Theory. Cambridge: Cambridge University Press (2015)

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Additional Files

Published

2017-09-01

How to Cite

Dimitri, N. (2017). Bitcoin Mining as a Contest. Ledger, 2, 31–37. https://doi.org/10.5195/ledger.2017.96

Issue

Vol. 2 (2017)

Section

Research Articles

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