Decentralized Mining in Centralized Pools

51 Pages Posted: 22 Mar 2018 Last revised: 22 Feb 2019

See all articles by Lin William Cong

Lin William Cong

University of Chicago - Booth School of Business

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: February 1, 2018

Abstract

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

Cong, Lin and He, Zhiguo and Li, Jiasun, Decentralized Mining in Centralized Pools (February 1, 2018). George Mason University School of Business Research Paper No. 18-9. Available at SSRN: https://ssrn.com/abstract=3143724 or http://dx.doi.org/10.2139/ssrn.3143724

Lin Cong (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Zhiguo He

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Jiasun Li

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://sites.google.com/site/jiasunlihome/

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