Decentralized Mining in Centralized Pools
51 Pages Posted: 22 Mar 2018 Last revised: 22 Feb 2019
Date Written: February 1, 2018
The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for public blockchains. However, mining pools as a financial innovation significantly escalates the arms race among competing miners and thus increases the energy consumption for proof-of-work-based blockchains. Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization | larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow slower. Empirical evidence from Bitcoin mining supports our model predictions, and the economic insights apply to many other blockchain protocols, as well as mainstream industries with similar characteristics.
Keywords: Arms Race, Bitcoin, Blockchain, Cryptocurrency, Financial Innovation, FinTech, Mining Pools, Risk-Sharing.
JEL Classification: D47, D82, D83, G14, G23, G28
Suggested Citation: Suggested Citation