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Bitcoin: An Impossibility Theorem for Proof-of-Work based Protocols

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Abstract

Bitcoin's main innovation lies in allowing a decentralized system that relies on anonymous, profit driven miners who can freely join the system. We formalize these properties in three axioms: anonymity of miners, no incentives for miners to consolidate, and no incentive to assuming multiple fake identities. This novel axiomatic formalization allows us to characterize which other protocols are feasible: Every protocol with these properties must have the same reward scheme as Bitcoin. This implies an impossibility result for risk-averse miners: no protocol satisfies the aforementioned constraints simultaneously without giving miners a strict incentive to merge. Furthermore, any protocol either gives up on some degree of decentralization or its reward scheme is equivalent to Bitcoin's.

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  • Jacob Leshno & Philipp Strack, 2019. "Bitcoin: An Impossibility Theorem for Proof-of-Work based Protocols," Cowles Foundation Discussion Papers 2204R, Cowles Foundation for Research in Economics, Yale University, revised Nov 2019.
    • Handle: RePEc:cwl:cwldpp:2204r
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d22/d2204.pdf
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    Cited by:

    1. Assimakis Kattis & Fabian Trottner, 2020. "Stabilizing Congestion in Decentralized Record-Keepers," Papers 2005.06093, arXiv.org.

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    Keywords

    Bitcoin; Random Selection; Proportional Selection Rule; Impossibility Theorem;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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