Proof-of-Work (PoW) Blockchain Network and Its Viability as a Payment System

55 Pages Posted: 24 Aug 2019 Last revised: 13 Oct 2020

See all articles by Ping He

Ping He

Tsinghua University, SEM

Dunzhe Tang

Tsinghua University, SEM

Jingwen Wang

Tsinghua University, SEM

Date Written: August 23, 2019

Abstract

This paper analyzes PoW blockchain network’s long-term cost ef- ficiency and short-term stability. Our equilibrium model builds upon the optimization problems of blockchain users and miners, and allows us to simultaneously determine token price, network hashrate, and user transaction fee. We prove that transaction fee bidding mechanism creates two types of welfare loss in the long- term: over-competition among users leads to excessive transaction fee payment; failure to realize fee’s positive externality on network security in user fee decision making also leads to a non-optimal fee level. By studying short-term feedback loop between network hashrate and miner income, we also prove that the network over- corrects itself and diverges when subject to a hashrate shock. We conclude that it has unstable equilibrium.

Keywords: Blockchain, Proof-of-Work, Cryptocurrency, Bitcoin, Transaction Fee, Mining, Hashrate, Payment System

JEL Classification: G10, D46, E42, L86

Suggested Citation

He, Ping and Tang, Dunzhe and Wang, Jingwen, Proof-of-Work (PoW) Blockchain Network and Its Viability as a Payment System (August 23, 2019). Available at SSRN: https://ssrn.com/abstract=3441605 or http://dx.doi.org/10.2139/ssrn.3441605

Ping He

Tsinghua University, SEM ( email )

Beijing, 100084
China
8610-62795754 (Phone)
8610-62784554 (Fax)

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/heping

Dunzhe Tang (Contact Author)

Tsinghua University, SEM ( email )

Beijing, 100084
China

Jingwen Wang

Tsinghua University, SEM ( email )

Beijing, Beijing 100084
China

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