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Miners' Reward Elasticity and Stability of Competing Proof-of-Work Cryptocurrencies

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  • Kawaguchi, Kohei
  • Noda, Shunya
  • Komiyama, Junpei

Abstract

The efficient processing of payments is crucial in transaction systems, particularly in those reliant on key cryptocurrencies like Bitcoin (BTC). However, the decentralized nature of these systems, coupled with the algorithmic incentives and competition among multiple cryptocurrencies for miners, poses significant challenges in analyzing transaction speed determination in Proof-of-Work (PoW) cryptocurrencies. To address these challenges, we developed a dynamic model of the multicurrency mining market where miners switch which currency to mine and identified the necessary and sufficient conditions for competing cryptocurrencies to maintain stable transaction speeds. We documented evidence of competition among cryptocurrencies for miners and estimated miners' hash supply reward elasticity using a discontinuity caused by "halving". We also conducted counterfactual simulations to examine the factors contributing to stability. Our results indicate that Bitcoin's stability heavily relies on external factors such as historical low hash-supply elasticity and interactions with other cryptocurrencies. Interestingly, despite their smaller size, Bitcoin's forks and their efficient difficulty adjustments significantly contribute to Bitcoin's stability. These findings imply that an algorithm upgrade to stabilize Bitcoin is highly recommended.

Suggested Citation

  • Kawaguchi, Kohei & Noda, Shunya & Komiyama, Junpei, 2022. "Miners' Reward Elasticity and Stability of Competing Proof-of-Work Cryptocurrencies," SocArXiv u58ns_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:u58ns_v1
    DOI: 10.31219/osf.io/u58ns_v1
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    References listed on IDEAS

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    1. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    2. Jonathan Chiu & Seyed Mohammadreza Davoodalhosseini & Janet Jiang & Yu Zhu, 2023. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1213-1248.
    3. Jiaqi Li & Andrew Usher & Yu Zhu, 2024. "Central Bank Digital Currency and Banking Choices," Staff Working Papers 24-4, Bank of Canada.
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