George Mason University School of Business
4400 University Drive, MSN 5F5
Fairfax, Virg 22030
Institutional Affiliation: George Mason University
NBER Working Papers and Publications
|February 2019||Decentralized Mining in Centralized Pools|
with Lin William Cong, Zhiguo He: w25592
The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organizat...