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 miners have higher incentives to act honestly than outsiders. 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

JEL Classification: D43, E42, G29