Decentralized Mining in Centralized Pools

By Lin William Cong, Zhiguo He, Jiasun Li. The Review of financial studies, 2019

332 citations recorded by the source corpus.

The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for blockchains: because of miners’ cross-pool diversification and pool managers’ endogenous fee setting, larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and grow more slowly. Instead, mining pools as a financial innovation escalate miners’ arms race and significantly increase the energy consumption of proof-of-work-based blockchains. Empirical evidence from Bitcoin mining supports our model’s predictions. The economic insights inform other consensus protocols and the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.

Subfields: Finance, Information Systems, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/a4d139a185a48e8b5f7bec10fc64e28f8a36dae4

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Citations in the corpus

Is Bitcoin Really Untethered? (2020, background): “2 The appeal, underlying value, and mechanics of cryptocurrencies and decentralized ledgers have been described in recent descriptive and theoretical work (Yermack (2017), Sockin and Xiong (2018), Cong, He, and Li (2019), Cong, Li, and Wang (2019)).”
Tokenomics: Dynamic Adoption and Valuation (2020, unknown): “30 Cryptocurrency exchanges help create liquidity, but may suffer from market manipulations such as wash trading, as discussed in Cong et al. (2020).”
Blockchain without Waste: Proof-of-Stake (2020, unknown): “Cong et al. (2020) and Lehar and Parlour (2020) study an analogous phenomenon for PoW blockchains. Lehar and Parlour (2020) use Bitcoin data to argue that this phenomenon facilitates collusion among Bitcoin miners whereas Cong et al. (2020) theoretically demonstrate that it “severely escalate[s] the”
The real climate and transformative impact of ICT: A critique of estimates, trends, and regulations (2021, background): “Energy consumption can also increase through escalation of the ‘‘mining arms race’’ due to improving risk sharing for proof of work blockchains.(71) Focusing on cryptocurrencies, one study indicates that Bitcoin’s annual electricity requirements of 68.”
Some simple bitcoin economics (2019, background): “Typically, individual miners associate in large mining pools, thereby eliminating the idiosynchratic risk of mining success, see Cong, He, and Li (2018).”