Oceanic Games: Centralization Risks and Incentives in Blockchain Mining

TL;DR

This paper applies Oceanic Games theory to blockchain mining to analyze centralization risks, revealing incentives for miners to merge and offering insights for designing more sustainable cryptocurrencies.

Contribution

It adapts Oceanic Games to blockchain mining, providing a novel framework to understand resource concentration and strategic mergers among miners.

Findings

Miners have incentives to merge to increase resource value.

The model explains observed centralization in mining power.

Insights for designing decentralized and sustainable blockchain systems.

Abstract

To participate in the distributed consensus of permissionless blockchains, prospective nodes -- or miners -- provide proof of designated, costly resources. However, in contrast to the intended decentralization, current data on blockchain mining unveils increased concentration of these resources in a few major entities, typically mining pools. To study strategic considerations in this setting, we employ the concept of Oceanic Games, Milnor and Shapley (1978). Oceanic Games have been used to analyze decision making in corporate settings with small numbers of dominant players (shareholders) and large numbers of individually insignificant players, the ocean. Unlike standard equilibrium models, they focus on measuring the value (or power) per entity and per unit of resource} in a given distribution of resources. These values are viewed as strategic components in coalition formations, mergers and resource acquisitions. Considering such issues relevant to blockchain governance and long-term sustainability, we adapt oceanic games to blockchain mining and illustrate the defined concepts via examples. The application of existing results reveals incentives for individual miners to merge in order to increase the value of their resources. This offers an alternative perspective to the observed centralization and concentration of mining power. Beyond numerical simulations, we use the model to identify issues relevant to the design of future cryptocurrencies and formulate prospective research questions.