Miners' Reward Elasticity and Stability of Competing Proof-of-Work Cryptocurrencies

Abstract

Proof-of-Work cryptocurrencies, such as Bitcoin and its forks, employ miners to sustain the system through algorithmic adjustments to the expected reward. In this study, we present a short-run supply-side model of the multicurrency mining market and identify the conditions under which cryptocurrencies can maintain a stable transaction speed. We estimate miners' labor supply elasticity using a "halving" event and perform counterfactual simulations to analyze the stability of Bitcoin. Our findings suggest that the stability of Bitcoin is heavily dependent on low hash-supply elasticity and interactions with other smaller cryptocurrencies. However, upgrading the algorithm can stabilize Bitcoin irrespective of these factors.

Keywords: Blockchain; Cryptocurrency; Proof-of-Work; SHA-256; Bitcoin; Convergency; Efficiency; Mining Market; Algorithmic Competition; Hash Supply Elasticity

JEL Classification: G00,G20, L11, L13, L17, L86