Miner Collusion and the BitCoin Protocol

39 Pages Posted: 17 Apr 2020 Last revised: 10 May 2021

See all articles by Alfred Lehar

Alfred Lehar

University of Calgary - Haskayne School of Business

Christine A. Parlour

University of California, Berkeley - Finance Group

Date Written: March 22, 2020

Abstract

Bitcoin users can offer fees to the miners who record transactions on the Blockchain. We document high variation of Bitcoin fees, not only over time, but also within blocks. Further, the blockchain rarely runs at capacity, even though there appears to be excess demand. We argue that this is inconsistent with competitive mining, but is consistent with strategic capacity management. If agents believe that only high fee transactions are executed in a timely fashion then strategic capacity management can be used to increase fee revenue. We note that mining pools facilitate collusion, and estimate that they have extracted least 200 million USD a year in excess fees by making processing artificially capacity scarce

Keywords: Bitcoin, Transaction Costs, Block-chain, Decentralized Finance

Suggested Citation

Lehar, Alfred and Parlour, Christine A., Miner Collusion and the BitCoin Protocol (March 22, 2020). Available at SSRN: https://ssrn.com/abstract=3559894 or http://dx.doi.org/10.2139/ssrn.3559894

Alfred Lehar (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-4567 (Phone)

HOME PAGE: http://homepages.ucalgary.ca/~alehar/

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

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