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A Note on the Non-proportionality of Winning Probabilities in Bitcoin

Author

Listed:
  • José Parra-Moyano

    (IMD Lausanne)

  • Gregor Reich

    (Tsumcor Research AG)

  • Karl Schmedders

    (IMD Lausanne)

Abstract

The security of any proof-of-work blockchain protocol is based upon the assumption that the probability of a miner finding the next valid block is proportional to that miner’s hashing power and constant throughout the process of mining that block (i.e., that the mining process is a “memoryless” process). While the literature assumes that the mining process is indeed memoryless, in this paper we use deductive reasoning to show how, given the finiteness of hashing functions’ domains, this is not the case. This implies that the Bitcoin protocol induces a centralization of miners’ hashing power, which in turn threatens the long-term viability of Bitcoin and of other cryptocurrencies based on similar protocols. The novelty of this paper stems from our documenting of a previously unrecognized flaw in the incentive system sustaining Bitcoin’s security.

Suggested Citation

  • José Parra-Moyano & Gregor Reich & Karl Schmedders, 2024. "A Note on the Non-proportionality of Winning Probabilities in Bitcoin," Computational Economics, Springer;Society for Computational Economics, vol. 64(3), pages 1697-1714, September.
    • Handle: RePEc:kap:compec:v:64:y:2024:i:3:d:10.1007_s10614-023-10503-2
    DOI: 10.1007/s10614-023-10503-2
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    References listed on IDEAS

    as
    1. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
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