Proof-of-Work (PoW) Blockchain Network and Its Viability as a Payment System
55 Pages Posted: 24 Aug 2019 Last revised: 13 Oct 2020
Date Written: August 23, 2019
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: Suggested Citation