Equilibrium of Blockchain Miners with Dynamic Asset Allocation

TL;DR

This paper models blockchain miners' strategic behavior with dynamic asset allocation, revealing equilibrium market shares influenced by mining costs and highlighting potential risks of centralization by highly cost-efficient miners.

Contribution

It introduces a new equilibrium model for miners' market shares considering cost structures and strategic asset allocation in blockchain mining.

Findings

Miners' market share at equilibrium depends on mining costs.

No incentive for miners to exceed 50% hash rate if costs are equal.

Highly cost-efficient miners can dominate over 50%, risking ecosystem stability.

Abstract

We model and analyze blockchain miners who seek to maximize the compound return of their mining businesses. The analysis of the optimal strategies finds a new equilibrium point among the miners and the mining pools, which predicts the market share of each miner or mining pool. The cost of mining determines the share of each miner or mining pool at equilibrium. We conclude that neither miners nor mining pools who seek to maximize their compound return will have a financial incentive to occupy more than 50% of the hash rate if the cost of mining is at the same level for all. However, if there is an outstandingly cost-efficient miner, then the market share of this miner may exceed 50% in the equilibrium, which can threaten the viability of the entire ecosystem.