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Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies

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Listed:
  • Rod Garratt
  • Maarten van Oordt

Abstract

We assess how the cost structure of cryptocurrency mining affects the response of miners to exchange rate fluctuations and the immutability of cryptocurrency ledgers that rely on proof-of- work. We show that the amount of mining power supplied to currencies that rely on application-specific integrated circuits (ASICs), such as Bitcoin, responds less to adverse exchange rate shocks than other currencies respond to such shocks, a fact that is instrumental to avoiding double-spending attacks. The results may change if mining equipment used for one cryptocurrency can be transferred to another. For smaller currencies with low exchange rate correlation, transferability eliminates the protection that fixed costs provide. Our results weaken doomsday predictions for Bitcoin and other cryptocurrencies with declining block rewards.

Suggested Citation

  • Rod Garratt & Maarten van Oordt, 2020. "Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies," Staff Working Papers 20-27, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-27
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    References listed on IDEAS

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    Cited by:

    1. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    2. Pavel Ciaian & d'Artis Kancs & Miroslava Rajcaniova, 2021. "Interdependencies between Mining Costs, Mining Rewards and Blockchain Security," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 25-62, May.
    3. Maarten van Oordt, 2022. "The Emerging Autonomy–Stability Choice for Stablecoins," Tinbergen Institute Discussion Papers 22-015/IV, Tinbergen Institute.
    4. Rodney Garratt, 2022. "Fabian Schär and Aleksander Berentsen: Bitcoin, Blockchain, and Cryptoassets: A Comprehensive Introduction," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 57(1), pages 27-30, January.
    5. Alon Benhaim & Brett Hemenway Falk & Gerry Tsoukalas, 2021. "Scaling Blockchains: Can Committee-Based Consensus Help?," Papers 2110.08673, arXiv.org, revised Dec 2022.

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    More about this item

    Keywords

    Digital currencies and fintech; Payment clearing and settlement systems;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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