Is Decentralization Sustainable in the Bitcoin System?

45 Pages Posted: 11 Nov 2019 Last revised: 23 Dec 2020

See all articles by Varghese Jacob

Varghese Jacob

University of Texas at Dallas - Department of Accounting & Information Management

Sailendra Prasanna Mishra

University of Texas at Dallas - Naveen Jindal School of Management

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: October 30, 2019

Abstract

The Bitcoin system is a decentralized monetary system in that any participant can potentially verify and record transactions onto a public ledger. Using a simple model, we show that the number of miners could be negatively (positively) related to the expected rewards, if miners with low-operating costs face less (more) severe financing constraints. We characterize the possibility of miners with low-operating (high-operating) costs facing less (more) severe financing constraints as large-size (small-size) miners. The empirical evidence supports the model’s prediction of large-size and small-size miner characterization. The negative association between the number of miners and expected rewards is attributable to the bitcoin’s exchange rate. Collectively, our evidence suggests that even though the Bitcoin system is designed as an egalitarian system, it is likely to evolve into a near-centralized system because of economic forces.

Keywords: Bitcoin, Blockchain, Cryptocurrency, Mining, Proof-of-work, Miners

JEL Classification: D43, G2, L13, G10

Suggested Citation

Jacob, Varghese and Mishra, Sailendra and Radhakrishnan, Suresh, Is Decentralization Sustainable in the Bitcoin System? (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3478373 or http://dx.doi.org/10.2139/ssrn.3478373

Varghese Jacob

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

Sailendra Mishra (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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