A Note on the Non-Proportionality of Winning Probabilities in Bitcoin

18 Pages Posted: 17 Jun 2019 Last revised: 19 Feb 2021

See all articles by José Parra-Moyano

José Parra-Moyano

Copenhagen Business School

Gregor Reich

Norwegian School of Economics (NHH) - Department of Strategy and Management

Karl Schmedders

IMD Lausanne

Date Written: October 1, 2020

Abstract

It is widely assumed that the selection process in a blockchain is based on proportional winning probabilities. The reliability and security of any blockchain is based upon this assumption. However, making an analogy between the Bitcoin protocol and the classical statistical urn problem, we argue that, at least on a theoretical level, the selection process in several blockchains is based on nonproportional winning probabilities. This reveals a misconception regarding the incentive structure of many blockchain protocols. We develop an empirical approach to testing for nonproportional winning probabilities in any blockchain, and offer a solution to this problem.

Keywords: Bitcoin, Blockchain, Choice Models

JEL Classification: C25, C44

Suggested Citation

Parra-Moyano, José and Reich, Gregor and Schmedders, Karl, A Note on the Non-Proportionality of Winning Probabilities in Bitcoin (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3399742 or http://dx.doi.org/10.2139/ssrn.3399742

José Parra-Moyano (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Gregor Reich

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Karl Schmedders

IMD Lausanne ( email )

Lausanne, CH-1003
Switzerland
+41 (0)79 596 8956 (Phone)

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