The Blockchain Folk Theorem

71 Pages Posted: 25 Jan 2018

See all articles by Bruno Biais

Bruno Biais

University of Toulouse 1 - Toulouse School of Economics (TSE)

Christophe Bisiere

Universite de Toulouse - (IDEI - CRG)

Matthieu Bouvard

McGill University - Desautels Faculty of Management

Catherine Casamatta

TSE-University of Toulouse 1

Date Written: January 5, 2018

Abstract

Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse 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.

Keywords: blockchain, forks, proof-of-work, distributed ledger, multiplicity of equilibria, coordination game

JEL Classification: C73, G2, L86

Suggested Citation

Biais, Bruno and Bisiere, Christophe and Bouvard, Matthieu and Casamatta, Catherine, The Blockchain Folk Theorem (January 5, 2018). Swiss Finance Institute Research Paper No. 17-75. Available at SSRN: https://ssrn.com/abstract=3108601 or http://dx.doi.org/10.2139/ssrn.3108601

Bruno Biais (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Christophe Bisiere

Universite de Toulouse - (IDEI - CRG) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France

Matthieu Bouvard

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Catherine Casamatta

TSE-University of Toulouse 1 ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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