Bitcoin Mining Decentralization via Cost Analysis

TL;DR

This paper analyzes the economic factors influencing Bitcoin mining decentralization, focusing on cost structures, profitability, and how scale impacts miner behavior and network decentralization.

Contribution

It introduces a formal cost-based model of Bitcoin mining profitability that considers off-peak power pricing and diverse investment strategies, addressing gaps in existing models.

Findings

Cost analysis reveals conditions for sustainable small-scale mining.

Scaling effects influence decentralization and miner profitability.

Alternative profitable models exist at smaller scales.

Abstract

Bitcoin mining presents a significant economic incentive for efficient hashing and broadcast of data, both parameters stemming from the Proofs of Work used to advance the network. This incentive has led to the development of Bitcoin specific application specific integrated circuits and centralized mining pools, undermining the decentralized motivations behind Bitcoin's design. In addition, the imminent block reward halving threatens the profitability of mining at any scale. Some work has been done in formal models for miner profitability, but existing models do not account for conditions such as the pricing of off-peak power and diverse investment strategies regarding sunken costs. There is also a lack of formal study of how the profit model changes as mining scales from the individual to the industrial level. Given the lack of analysis of these conditions, there are alternative models for profitable or net zero mining that operate at smaller, and therefore more desirable, scale.