Proof-of-Work’s Limited Adoption Problem

36 Pages Posted: 20 Mar 2019

See all articles by Franz J. Hinzen

Franz J. Hinzen

New York University (NYU) - Department of Finance

Kose John

New York University (NYU) - Department of Finance

Fahad Saleh

McGill University - Desautels Faculty of Management

Date Written: February 28, 2019

Abstract

We demonstrate that a limited adoption problem arises endogenously in a Proof-of-Work (PoW) payments blockchain. Increased transaction demand increases fees because PoW imposes an artificial supply constraint. The increased fees in turn induce validators to enter the network because of PoW’s permissionless nature. The increased network size protracts the consensus process and thereby delays payment confirmation. Given access to traditional payment systems, users prefer to transact via the blockchain only if they possess extreme insensitivity to delays. A PoW payments blockchain therefore cannot obtain widespread adoption. A permissioned blockchain offers an alternative to overcome this problem because such a blockchain neither imposes PoW’s artificial supply constraint nor admits free entry among validators. Nonetheless, validators may collude on such a blockchain if implemented with a standard consensus protocol. We offer an alternative consensus protocol that overcomes such collusion. Our protocol employs the blockchain’s native cryptocurrency to induce the desired behavior and thereby provides both expedient transaction processing and blockchain security.

Keywords: Blockchain, Proof-of-Work, Limited Adoption, FinTech, Stake

JEL Classification: E42, G00, G29

Suggested Citation

Hinzen, Franz J. and John, Kose and Saleh, Fahad, Proof-of-Work’s Limited Adoption Problem (February 28, 2019). NYU Stern School of Business. Available at SSRN: https://ssrn.com/abstract=3334262

Franz J. Hinzen

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012
United States

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Fahad Saleh (Contact Author)

McGill University - Desautels Faculty of Management ( email )

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

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