Decentralized Mining in Centralized Pools

55 Pages Posted: 26 Feb 2019 Last revised: 12 Apr 2019

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management

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 2019

Abstract

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.

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Suggested Citation

Cong, Lin and He, Zhiguo and Li, Jiasun, Decentralized Mining in Centralized Pools (February 2019). NBER Working Paper No. w25592, Available at SSRN: https://ssrn.com/abstract=3341252

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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

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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