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Optimal mining in proof-of-work blockchain protocols

Author

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  • Soria, Jorge
  • Moya, Jorge
  • Mohazab, Amin

Abstract

This paper examines the economic mechanism of cryptocurrency mining. By presenting a profit function, a maximization equilibrium is obtained. The model provides a formal approach to the demand for hashing power as a function of revenues, mining costs and the number of miners. We consider how the equilibrium is affected by passive miners. We use these results to introduce a formulation of the price elasticity of the demand for hashing power with respect to the cost of energy. The model is simulated using Reinforcement Learning algorithms that arrive to similar equilibrium results. The article concludes with implications of the model for policymaking.

Suggested Citation

  • Soria, Jorge & Moya, Jorge & Mohazab, Amin, 2023. "Optimal mining in proof-of-work blockchain protocols," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007863
    DOI: 10.1016/j.frl.2022.103610
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cryptocurrencies; Mining; Machine learning; Elasticity; Hashrate; Proof-of-work;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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