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The Blockchain Folk Theorem

Author

Listed:
  • Bruno Biais

    (University of Toulouse 1)

  • Christophe Bisiere

    (University of Toulouse)

  • Matthieu Bouvard

    (McGill University)

  • Catherine Casamatta

    (University of Toulouse 1)

Abstract

Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.

Suggested Citation

  • Bruno Biais & Christophe Bisiere & Matthieu Bouvard & Catherine Casamatta, 2017. "The Blockchain Folk Theorem," Swiss Finance Institute Research Paper Series 17-75, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1775
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G2 - Financial Economics - - Financial Institutions and Services
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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