Decentralized Mining in Centralized Pools

54 Pages Posted: 22 Mar 2018 Last revised: 10 Dec 2019

See all articles by Lin William Cong

Lin William Cong

Cornell University

Zhiguo He

University of Chicago - Finance

Jiasun Li

George Mason University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2019


The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.

Keywords: Arms Race, Bitcoin, Blockchain, Energy Consumption, Industrial Organization, Mining Pools, PoW, Risk-Sharing

JEL Classification: D47, D82, D83, G14, G23, G28

Suggested Citation

Cong, Lin and He, Zhiguo and Li, Jiasun, Decentralized Mining in Centralized Pools (November 1, 2019). George Mason University School of Business Research Paper No. 18-9. Available at SSRN: or

Lin Cong (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States


Zhiguo He

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States


Jiasun Li

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States


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