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Miners' Reward Elasticity and Stability of Competing Proof-of-Work Cryptocurrencies

Author

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  • Kawaguchi, Kohei
  • Noda, Shunya

Abstract

Proof-of-Work cryptocurrencies, such as Bitcoin and its forks, hire miners (freelance contributors) to maintain the system by algorithmically setting the reward. Therefore, the nature of miners' labor supply is essential for the cryptocurrency's stability. We develop a short-run supply-side model of the multicurrency mining market and estimate miners' labor supply elasticity by exploiting the discontinuity created by an event called halving. The stability of Bitcoin hinges on external factors lowering the labor supply elasticity, such as the interaction with competing currencies. Upgrading algorithm can stabilize Bitcoin regardless of external factors and improve the mining market's energy consumption rate by 2.9%.

Suggested Citation

  • Kawaguchi, Kohei & Noda, Shunya, 2022. "Miners' Reward Elasticity and Stability of Competing Proof-of-Work Cryptocurrencies," SocArXiv u58ns, Center for Open Science.
    • Handle: RePEc:osf:socarx:u58ns
    DOI: 10.31219/osf.io/u58ns
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    References listed on IDEAS

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    1. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    2. Daniel Ferreira & Jin Li & Radoslawa Nikolowa, 2023. "Corporate Capture of Blockchain Governance," The Review of Financial Studies, Society for Financial Studies, vol. 36(4), pages 1364-1407.
    3. Gur Huberman & Jacob D Leshno & Ciamac Moallemi, 2021. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System [Blockchain Economics]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 3011-3040.
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