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Bitcoin Mechanics: Proof-of-Work (PoW) Blockchain = a chain of - PowerPoint PPT Presentation

Bitcoin Mechanics: Proof-of-Work (PoW) Blockchain = a chain of blocks; Block = validated transactions Many miners (record keepers) are competing for the right to add a block Miners are involved in hash computation = Lottery draw


  1. Bitcoin Mechanics: Proof-of-Work (PoW) • Blockchain = a chain of blocks; Block = validated transactions • Many miners (record keepers) are competing for the right to add a block • Miners are involved in hash computation = Lottery draw • Win the lottery → Add a block and get reward (fixed amount of Bitcoins)

  2. Difficulty Adjustment Algorithm (DAA) • Hash rate, the total amount of hash computation, may vary across time. • Bitcoin system cannot observe the hash rate, so needs to estimate it. • DAA first estimates the hash rate, and then sets the winning rate of the lottery to keep the block arrival rate (10 min/block in Bitcoin). • Problem: Bitcoin DAA implicitly assumes that hash rate will not change after the winning rate changes, ignoring miners’ incentive. • Hash supply is increasing in winning rate. • Miners respond to the adjustment and changes the hash supply. • If the aggregate supply is elastic enough, Bitcoin DAA cannot stabilize the economy.

  3. Bitcoin Cash DAA is much more “robust” • The hash supply will be elastic if (1) the price of Bitcoin is low, and/or (2) the number of miners is large. • Our empirical analysis suggests that the Bitcoin system was about to face a crisis in November 2018.

  4. Miners may disagree with the upgrade • Bitcoin can stabilize the system by upgrading DAA to Bitcoin Cash DAA, and the upgrade is beneficial to users. • However, such an upgrade may be difficult to implement. • The majority of miners, who has relatively large electricity cost, can enjoy more rewards under an unstable DAA. Stable DAA Unstable DAA → Always low winning rate → Can enjoy profit in (= low reward) easy-to-win epochs. → Never turn on machine → Enjoy no profit Full paper: https://ssrn.com/abstract=3410460

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