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Market Equilibria and Risk Diversification in Blockchain Mining Economies

In: Mathematical Research for Blockchain Economy

Author

Listed:
  • Yun Kuen Cheung

    (University of London)

  • Stefanos Leonardos

    (King’s College London)

  • Shyam Sridhar

    (Singapore University of Technology and Design
    Ethereum Foundation)

  • Georgios Piliouras

    (Singapore University of Technology and Design)

Abstract

The success of blockchain-based applications, most notably cryptocurrencies, has brought the allocation of mining resources at the epicenter of academic and entrepreneurial attention. Critical for the stability of these markets is the question of how miners should adjust their allocations over time in response to changes in their environment and in other miners’ strategies. In this paper, we present a proportional response (PR) protocol that makes these adjustments for any risk profile of a miner. The protocol has low informational requirements and is particularly suitable for such distributed settings. When the environment is static, we formally show that the PR protocol attains stability by converging to the market equilibrium. For dynamic environments, we carry out an empirical study with actual data from four popular cryptocurrencies. We find that running the PR protocol with higher risk diversification is beneficial both to the market by curbing volatile re-allocations (and, thus, increasing market stability), and to individual miners by improving their profits after accounting for factor mobility (switching) costs.

Suggested Citation

  • Yun Kuen Cheung & Stefanos Leonardos & Shyam Sridhar & Georgios Piliouras, 2023. "Market Equilibria and Risk Diversification in Blockchain Mining Economies," Lecture Notes in Operations Research, in: Panos Pardalos & Ilias Kotsireas & Yike Guo & William Knottenbelt (ed.), Mathematical Research for Blockchain Economy, pages 23-46, Springer.
    • Handle: RePEc:spr:lnopch:978-3-031-18679-0_2
    DOI: 10.1007/978-3-031-18679-0_2
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