Towards Proof-of-Work Cryptocurrency Valuation: Mining Games, Network Effects and the Social Value of Blockchain

32 Pages Posted: 5 Apr 2019

See all articles by Savva Shanaev

Savva Shanaev

Northumbria University; Government of the Russian Federation - Financial University (Moscow Branch)

Arina Shuraeva

University of London

Mikhail Vasenin

Government of the Russian Federation - Financial University (Moscow Branch)

Maksim Kuznetsov

Financial University under the Government of the Russian Federation

Date Written: March 8, 2019

Abstract

In this study, a mathematical model of proof-of-work cryptocurrency valuation is developed based on the concepts of simultaneous equilibria in two mining games, the purchasing power parity in the system of equations of exchange and the network effects of transaction cost optimisation in the economy where agents utilise both conventional and digital currencies to process payments. The model lays the foundation for rigorous long-term proof-of-work cryptocurrency valuation superior to existing approaches that are solely based on variations of Metcalfe’s law or costs of mining. Based on the model, the long-term Bitcoin equilibrium price conditional on current block size limit is $106, while if the block size limit is abandoned, the conditional equilibrium price is $6725. Network hashrate is consistent with the no-limit scenario, while the transaction fees are consistent with the status quo, revealing an important source of uncertainty on the market. The developed framework is also applied to the measure the net social value of proof-of-work cryptocurrencies, and Bitcoin long-term social value of equilibrium is shown to be positive at $126,200 per block. The comparison of equilibrium and optimal cases shows that external intervention is not necessary to guarantee socially beneficial outcomes.

Keywords: cryptocurrency, valuation, proof-of-work, bitcoin, network effects, transaction costs, alternative investments, simultaneous equilibria, social value of blockchain

JEL Classification: C62, D53, D61, E42, G12, G19

Suggested Citation

Shanaev, Savva and Shuraeva, Arina and Vasenin, Mikhail and Kuznetsov, Maksim, Towards Proof-of-Work Cryptocurrency Valuation: Mining Games, Network Effects and the Social Value of Blockchain (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=3352098 or http://dx.doi.org/10.2139/ssrn.3352098

Savva Shanaev (Contact Author)

Northumbria University ( email )

Pandon Building
208, City Campus East-1
Newcastle-Upon-Tyne, Newcastle NE1 8ST
United Kingdom

Government of the Russian Federation - Financial University (Moscow Branch) ( email )

Arina Shuraeva

University of London ( email )

Senate House
Malet Street
London, WC1E 7HU
United Kingdom

Mikhail Vasenin

Government of the Russian Federation - Financial University (Moscow Branch) ( email )

Maksim Kuznetsov

Financial University under the Government of the Russian Federation ( email )

Москва
Russia

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