Cristián Ugarte, Econ-UC Berkeley

Sala 209

“Time is (Crypto)Money: Mining Difficulty and Incentive Compatibility of Cryptocurrencies”

Coautoreado con Marcelo Arenas y Martín Ugarte

Abstract: Contrary to traditional payment systems, Bitcoin does not rely on a trusted third party to maintain a ledger of transactions. Instead, it relies on a protocol based on a free-entry market where agents (called miners) compete for appending blocks of transactions to the ledger. Specifically, miners append these blocks to a shared tree-like data structure of which the longest branch, called the blockchain, is the set of valid transactions (the ledger). For users to consider Bitcoin a secure payment system, they need to know that once a transaction has been validated (added to the blockchain) it cannot be reversed. In order to achieve this, the protocol prescribes miners to append new blocks to the blockchain. In this work, we model the Bitcoin protocol as a game of incomplete information. We show that previous studies of miners’ behavior consider oversimplified models, either (1) ignoring important technical aspects of the protocol or (2) analyzing the strategy of a single player without considering the equilibria of the game. We use our model to analyze the strategy known as selfish mining and show that the behavior prescribed by the protocol is not necessarily an equilibrium. We find that this situation can be avoided if mining difficulty does not decrease over time. Finally, we show that even if difficulty decreases according to the protocol rules, there exists an equilibrium in which, on the equilibrium path, miners behave as prescribed by the protocol.