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The blockchain folk theorem

Author

Listed:
  • Biais, Bruno
  • Bisière, Christophe
  • Bouvard, Matthieu
  • Casamatta, Catherine

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 and asset ownership, but are they? We model the blockchain as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. We show that mining the longest chain is a Markov perfect equilibrium, without forking on the equilibrium path, in line with the seminal vision of Nakamoto (2008). We also clarify, however, that the blockchain game is a coordination game, which opens the scope for multiple equilibria. We show there exist equilibria with forks, leading to orphaned blocks and also possibly to persistent divergence between different chains.

Suggested Citation

  • Biais, Bruno & Bisière, Christophe & Bouvard, Matthieu & Casamatta, Catherine, 2017. "The blockchain folk theorem," IDEI Working Papers 873, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2017.
    • Handle: RePEc:ide:wpaper:31763
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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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