When Can You Trust Bitcoin? Value-Dependent Block Confirmation to Determine Transaction Finalit

TL;DR

This paper investigates how transaction amount and user risk preferences influence Bitcoin transaction finality, proposing a value-dependent confirmation model based on blockchain fork probabilities and user risk tolerance.

Contribution

It introduces a novel model linking transaction confirmation depth to revocation risk, incorporating prospect theory to account for value-dependent user decision-making.

Findings

Confirmation probability decreases with blockchain forks over time.

Transaction amount and user risk tolerance significantly affect confirmation confidence.

A relationship between block depth and revocation risk is established.

Abstract

We study financial transaction confirmation finality in Bitcoin as a function of transaction amount and user risk tolerance. A transaction is recorded in a block on a blockchain. However, a transaction may be revoked due to a fork in the blockchain, the odds of which decrease over time but never reach zero. Therefore, a transaction is considered confirmed if its block is sufficiently deep in the blockchain. This depth is usually set empirically at some fixed number such as six blocks. We analyze forks under varying network delays in simulation and actual Bitcoin data. Based on this analysis, we establish a relationship between block depth and the probability of confirmation revocation due to a fork. We use prospect theory to relate transaction confirmation probability to transaction amount and user risk tolerance.