Security-Cost Efficiency of Competing Proof-of-Work Cryptocurrencies

51 Pages Posted: 9 Feb 2022 Last revised: 19 Apr 2022

See all articles by Kohei Kawaguchi

Kohei Kawaguchi

Hong Kong University of Science and Technology

Shunya Noda

University of Tokyo - Faculty of Economics; Vancouver School of Economics, University of British Columbia

Date Written: April 18, 2022

Abstract

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

Kawaguchi, Kohei and Noda, Shunya, Security-Cost Efficiency of Competing Proof-of-Work Cryptocurrencies (April 18, 2022). Available at SSRN: https://ssrn.com/abstract=3974376 or http://dx.doi.org/10.2139/ssrn.3974376

Kohei Kawaguchi (Contact Author)

Hong Kong University of Science and Technology ( email )

6070 LSK Building, HKUST
Clear Water Bay
Kowloon
Hong Kong

Shunya Noda

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo, 113-0033
Japan

Vancouver School of Economics, University of British Columbia ( email )

6000 Iona Dr
Vancouver, British Columbia V6T 1L4
Canada

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