Security-Cost Efficiency of Competing Proof-of-Work Cryptocurrencies
51 Pages Posted: 9 Feb 2022 Last revised: 19 Apr 2022
Date Written: April 18, 2022
Proof-of-Work cryptocurrencies consume vast energy to rule out potential attacks. Therefore, evaluating and improving the security-cost efficiency, the cost of attacking the system per unit of operating cost, is important. In this paper, we demonstrate that the stability of miners' supply of work over time is essential for the security-cost efficiency, and it is determined by the Difficulty Adjustment Algorithm (DAA) of the currency and the reward elasticity of the miner's supply of work. To this end, we develop a model of the multicurrency mining market and estimate the own- and cross-elasticity of the hash supply to the reward by exploiting the reward shock event, called halving. We use the estimated model to simulate the mining market and evaluate the security-cost efficiency. We find that Bitcoin is stable because of the inelastic miners, regardless of the DAA, whereas other smaller coins face highly elastic miners and can be stable only with efficient DAAs. Upgrading all relevant currencies' DAAs to the state-of-art one substantially improves the security-cost efficiency and saves the energy-consumption rate by 0.21 GW or 3.2% while maintaining the security level.
Keywords: Blockchain; Cryptocurrency; Proof-of-Work; SHA-256; Bitcoin; Security-Cost Efficiency; Mining Market; Algorithmic Competition; Hash Supply Elasticity
JEL Classification: G00,G20, L11, L13, L17, L86
Suggested Citation: Suggested Citation