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

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  • 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
    DOI: 10.34989/swp-2020-27
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    Cited by:

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    3. 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.
    4. Maarten van Oordt, 2022. "The Emerging Autonomy–Stability Choice for Stablecoins," Tinbergen Institute Discussion Papers 22-015/IV, Tinbergen Institute.
    5. Jin, Minyue & Zhang, Xinxin & Yue, Xiaohang & Zuo, Qianzhou & Nie, Jiajia, 2025. "Consensus mechanism selection in Web 3.0 blockchain platforms: Proof of Work vs. Proof of Stake," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 200(C).
    6. Garratt, Rodney J. & van Oordt, Maarten R.C., 2026. "The crypto multiplier," Journal of Corporate Finance, Elsevier, vol. 96(C).
    7. Auer, Raphael & Monnet, Cyril & Shin, Hyun Song, 2025. "Distributed ledgers and the governance of money," Journal of Financial Economics, Elsevier, vol. 167(C).
    8. Alon Benhaim & Brett Hemenway Falk & Gerry Tsoukalas, 2021. "Scaling Blockchains: Can Committee-Based Consensus Help?," Papers 2110.08673, arXiv.org, revised Dec 2022.
    9. Joshua S. Gans & Hanna Halaburda, 2024. "“Zero Cost” Majority Attacks on Permissionless Proof of Work Blockchains," Management Science, INFORMS, vol. 70(6), pages 4155-4165, June.
    10. Shao, Enchuan & Rajapaksa, Danusha, 2024. "Miner competition and transaction fees," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    11. Zongxi Li & A. Max Reppen & Ronnie Sircar, 2024. "A Mean Field Games Model for Cryptocurrency Mining," Management Science, INFORMS, vol. 70(4), pages 2188-2208, April.
    12. Bruno Biais & Agostino Capponi & Lin William Cong & Vishal Gaur & Kay Giesecke, 2023. "Advances in Blockchain and Crypto Economics," Management Science, INFORMS, vol. 69(11), pages 6417-6426, November.
    13. 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.
    14. Castillo León, Jaime & Lehar, Alfred, 2026. "What data have told us about decentralized finance," Journal of Corporate Finance, Elsevier, vol. 96(C).
    15. Soumya Basu & David Easley & Maureen O’Hara & Emin Gün Sirer, 2023. "StableFees: A Predictable Fee Market for Cryptocurrencies," Management Science, INFORMS, vol. 69(11), pages 6508-6524, November.
    16. Shu, Mingyu & Liu, Baoliu & ouyang, Wenpei & Sun, Rengui & Lin, Yaoyang, 2025. "Multi-scale dynamic correlation and information spillover effects between climate risks and digital cryptocurrencies: Based on wavelet analysis and time-frequency domain QVAR," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 663(C).

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    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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