Equilibrium of Blockchain Miners with Dynamic Asset Allocation
This addresses the problem of blockchain security and centralization risks for cryptocurrency stakeholders, but it is incremental as it builds on existing economic models.
The paper models blockchain miners maximizing compound returns and finds a new equilibrium predicting market shares, showing that without cost advantages, no miner has incentive to exceed 50% hash rate, but a cost-efficient miner could surpass this threshold and threaten ecosystem viability.
We model and analyze blockchain miners who seek to maximize the compound return of their mining businesses. The analysis of the optimal strategies finds a new equilibrium point among the miners and the mining pools, which predicts the market share of each miner or mining pool. The cost of mining determines the share of each miner or mining pool at equilibrium. We conclude that neither miners nor mining pools who seek to maximize their compound return will have a financial incentive to occupy more than 50% of the hash rate if the cost of mining is at the same level for all. However, if there is an outstandingly cost-efficient miner, then the market share of this miner may exceed 50% in the equilibrium, which can threaten the viability of the entire ecosystem.