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Bitcoin blackout: Proof-of-work and the risks of mining centralization

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  • Scharnowski, Stefan
  • Shi, Yanghua

Abstract

Miners of proof-of-work networks like Bitcoin tend to gravitate towards regions with cheap energy. We analyze risks associated with this geographical centralization by exploiting a local electricity supply shock. Compared to a control group consisting of an energy-efficient proof-of-stake cryptocurrency, the blockchain’s capacity for processing transactions decreases while transaction fees increase substantially. The increased settlement latency on the blockchain also reduces secondary market quality as seen in higher exchange rate volatility, lower liquidity, and larger price differences between exchanges. Overall, our results suggest that geographical centralization poses short-lived but potentially severe system-wide risks to proof-of-work networks.

Suggested Citation

  • Scharnowski, Stefan & Shi, Yanghua, 2026. "Bitcoin blackout: Proof-of-work and the risks of mining centralization," Journal of Financial Stability, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:finsta:v:85:y:2026:i:c:s1572308926000719
    DOI: 10.1016/j.jfs.2026.101569
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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