Too Big to Cheat: Mining Pools' Incentives to Double Spend in Blockchain Based Cryptocurrencies
65 Pages Posted: 10 Jan 2020 Last revised: 1 Feb 2024
Date Written: December 19, 2019
Conventional wisdom in blockchain-based cryptocurrencies suggests that centralization of mining power undermines the credibility of cryptocurrencies. It does so by enhancing the risk of double-spending attacks, in which the same funds are used multiple times. However, centralization of mining power is commonly observed in cryptocurrencies. Contrary to a firmly held premise, our main findings indicate that under meager economic profits, incentives to act honestly increase with miner and pool sizes. Our results illustrate how to design dynamic incentives that generate self-enforcing mechanisms in cryptocurrencies. In this scenario, the potential loss of future income provides powerful incentives for large pools and miners to voluntarily act honestly and preserve the integrity of the cryptocurrency. In our model, we compare the double-spending costs generated by these vested interests to the cost advantage of being a large pool or a large miner. Our model conclusion that centralization is often harmless is consistent with the observed metrics in the 13 largest PoW cryptocurrencies.
Keywords: Blockchain, Cryptocurrencies, Bitcoin, Double Spending Attacks
JEL Classification: D43, E42, G29
Suggested Citation: Suggested Citation