NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Decentralized Mining in Centralized Pools

Lin William Cong, Zhiguo He, Jiasun Li

NBER Working Paper No. 25592
Issued in February 2019
NBER Program(s):Asset Pricing, Corporate Finance, Industrial Organization, Law and Economics, Monetary Economics

The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for public blockchains. However, mining pools as a financial innovation significantly escalates the arms race among competing miners and thus increases the energy consumption of proof-of-work-based blockchains. Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization --- larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow slower. Empirical evidence from Bitcoin mining supports our model predictions, and the economic insights apply to many other blockchain protocols, as well as mainstream industries with similar characteristics.

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Document Object Identifier (DOI): 10.3386/w25592

 
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