Too Big to Cheat: Mining Pools' Incentives to Double Spend in Blockchain Based Cryptocurrencies

Abstract

In most blockchain based cryptocurrencies majority of verification power is required for facilitating a successful double spending attack, i.e. using the same funds multiple times. Because possibility to double spend sharply deteriorates trust and value, concentration is traditionally considered to be a significant problem. We model agents’ incentives to facilitate double spending attacks under opportunity costs. Contrary to a host of previous literature, our main findings indicate that under meager economic profits large pools have higher incentives to act honestly than outsiders, our results hold for 13 major proof-of-work cryptocurrencies. Intuitively, this stems from the fact that mining pools holding more power in a cryptocurrency have stronger vested interest in it.

Keywords: Blockchain, Cryptocurrencies, Bitcoin, Double Spending Attacks

JEL Classification: D43, E42, G29