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Bitcoin Blackout: Proof-of-Work and the Risks of Mining Centralization

Author

Listed:
  • Stefan Scharnowski

    (University of Mannheim)

  • Yanghua Shi

    (International University of Japan)

Abstract

Miners of proof-of-work networks like Bitcoin tend to gravitate towards countries 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 fs capacity for transactions decreases while transaction fees widen 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

  • Stefan Scharnowski & Yanghua Shi, 2026. "Bitcoin Blackout: Proof-of-Work and the Risks of Mining Centralization," Working Papers EMS_2026_08, Research Institute, International University of Japan.
    • Handle: RePEc:iuj:wpaper:ems_2026_08
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    File URL: https://www2.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2026_08.pdf
    File Function: First version, 2026
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    Keywords

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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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