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, Revised in December 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 permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.

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Document Object Identifier (DOI): 10.3386/w25592

 
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