Proof-of-Work Cryptocurrencies: Does Mining Technology Undermine Decentralization?

54 Pages Posted: 29 Jun 2021 Last revised: 12 Sep 2022

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Sveinn Olafsson

Columbia University

Humoud Alsabah

Kuwait University

Date Written: September 11, 2022


Does the proof-of-work consensus protocol serve its intended purpose of supporting decentralized cryptocurrency mining? To address this question, we develop a game-theoretical model where miners first invest in hardware to improve the efficiency of their operations, and then compete for mining rewards in a rent-seeking game. We show that centralization grows with heterogeneity in mining costs, but hardware capacity constraints prevent the most efficient miners from monopolizing the mining process. Investment leads to a more decentralized network unless larger miners have a significant comparative advantage in acquiring new hardware. Our model generates empirically supported implications: (i) mining centralization is countercyclical with respect to mining reward, and (ii) a change in mining reward leads to a less than proportional change in hash rates.

Keywords: proof of work, cryptocurrencies, mining technology, decentralization, rent-seeking game

JEL Classification: D47, D82, D43, D83, G14, G23

Suggested Citation

Capponi, Agostino and Olafsson, Sveinn and Alsabah, Humoud, Proof-of-Work Cryptocurrencies: Does Mining Technology Undermine Decentralization? (September 11, 2022). Available at SSRN: or

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Sveinn Olafsson

Columbia University ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

Humoud Alsabah

Kuwait University ( email )

Safat, 13060

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