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... Therefore, existing miners have a significant capital advantage over new mining groups. Ref. [14] analyzed the cost of a single miner, assuming that a new miner enters into a free market with an expected profit equal to zero. According to his model, the miner cost must equal the value of newly mined Bitcoins. ...
... while an oscillator can be built using (14) as follows: ...
This paper examines the trading performances of several technical oscillators created using crypto-asset pricing methods for short-term bitcoin trading. Seven pricing models proposed in the professional and academic literature were transformed into oscillators, and two thresholds were introduced to create buy and sell signals. The empirical back-testing analysis showed that some of these methods proved to be profitable with good Sharpe ratios and limited max drawdowns. However, the trading performances of almost all methods significantly worsened after 2017, thus indirectly confirming an increasing financial literature that showed that the introduction of bitcoin futures in 2017 improved the efficiency of bitcoin markets.
... We want to determine theoretically the equilibrium relationships between blockchain security, cryptocurrency market outcomes and resources devoted to the blockchain mining. Building on the mining models of Thum (2018) and Budish (2018) and considering the PoW of the most popular cryptocurrencies as example, we model a rational miner i that decides on the quantity of computing capacity, m it (e.g. expressed by the number of computer operations), to devote for mining each block t (represented in block time measured in 10 minute interval which is the average time needed to mine a block in blockchain). ...
... where n t is the total number of miners and nt j =i m jt is the total blockchain computing capacity of other miners devoted to the block t (e.g. Cocco and Marchesi 2016;Thum 2018). However, Parra-Moyano, Reich and Schmedders (2019) show that the probability of relatively bigger miners winning the mining contest is higher than that of relatively smaller miners because there is a "learning" effect when mining a particular block with larger mining computers learning faster than smaller mining computers. ...
This paper studies to what extent the cost of operating a proof-of-work blockchain is intrinsically linked to the cost of preventing attacks, and to what extent the underlying digital ledger’s security budgets are correlated with the cryptocurrency market outcomes. We theoretically derive an equilibrium relationship between the cryptocurrency price, mining rewards and mining costs, and blockchain security outcomes. Using daily crypto market data for 2014- 2021 and employing the autoregressive distributed lag approach — that allows treating all the relevant moments of the blockchain series as potentially endogenous — we provide empirical evidence of cryptocurrency price and mining rewards indeed being intrinsically linked to blockchain security outcomes.
... The probability of a miner winning the mining contest (i.e. the right to record a new block on the ledger and collect the mining reward) depends on a miner's computer power devoted to each block relative to the computer power of other miners. Following the mining models of Thum (2018), Budish (2018), Schilling and Uhlig (2019), and Ciaian, Kancs, and Rajcaniova (2021), the total equilibrium computer power devoted to bitcoin mining can be expressed as 4 ...
... In this Appendix, we show a theoretical model to determine equilibrium relationships between bitcoin blockchain security, market outcomes, and resources devoted to the blockchain mining. Building on the mining models of Thum (2018), Budish (2018), Schilling and Uhlig (2019), and Ciaian, Kancs, and Rajcaniova (2020), we modelled a rational miner i that decides on the quantity of computer power, m it (e.g. expressed by the number of computer operations), to devote for mining each bitcoin block t (represented in block time measured in 10-minute intervals, which is the average time needed to mine a block in blockchain). ...
We studied the extent to which bitcoin blockchain security permanently depends on the underlying distribution of cryptocurrency market outcomes using daily blockchain and bitcoin data for 2014–2019 and employing the autoregressive-distributed lag (ARDL) approach. We tested three equilibrium hypotheses: (i) sensitivity of the bitcoin blockchain to mining reward, (ii) security outcomes of the bitcoin blockchain and the proof-of-work cost, and (iii) the speed of adjustment of the bitcoin blockchain security to deviations from the equilibrium path. Our results suggest that bitcoin price and mining rewards were intrinsically linked to bitcoin security outcomes.The bitcoin blockchain security’s dependency on mining costs was geographically differenced – it was more significant for the global mining leader China than for other world regions. Bitcoin blockchain security tended to revert relatively fast to its equilibrium security level after the input or output of price shocks.
... We want to determine theoretically the equilibrium relationships between blockchain security, cryptocurrency market outcomes and resources devoted to the blockchain mining. Building on the mining models of Thum (2018) and Budish (2018) and considering the PoW of the most popular cryptocurrencies as example, we model a rational miner i that decides on the quantity of computing capacity, mit (e.g. expressed by the number of computer operations), to devote for mining each block t (represented in block time measured in 10 minute interval which is the average time needed to mine a block in blockchain). ...
... Previous studies assume that the probability of winning the contest and validating a block is independent of the miner size: /( +∑ ≠ ), where nt is the total number of miners and ∑ ≠ is the total blockchain computing capacity of other miners devoted to the block t (e.g. Cocco and Marchesi 2016;Thum 2018). However, Parra-Moyano, Reich and Schmedders (2019) show that the probability of relatively bigger miners winning the mining contest is higher than that of relatively smaller miners because there is a "learning" effect when mining a particular block with larger mining computers learning faster than smaller mining computers. ...
This paper studies to what extent the cost of operating a proof-of-work blockchain is intrinsically linked to the cost of preventing attacks, and to what extent the underlying digital ledger security budgets are correlated with the cryptocurrency market outcomes. We theoretically derive an equilibrium relationship between the cryptocurrency price, mining rewards and mining costs, and blockchain security outcomes. Using daily crypto market data for 2014-2021 and employing the autoregressive distributed lag approach - that allows treating all the relevant moments of the blockchain series as potentially endogenous - we provide empirical evidence of cryptocurrency price and mining rewards indeed being intrinsically linked to blockchain security outcomes.
... Notwithstanding, several model features constitute relevant elements for future research. Just to cite a few, elements deserving further attention relate to the introduction of switching costs for representing the efforts required for mining [41], the volatility of the cryptoasset value in the market [42], and other mechanisms, such as the halving of the miners' reward. Also, the electricity cost of mining, which we introduced via the parameter C in equation (2.1), represents a critical element of the game. ...
The energy sustainability of blockchains, whose consensus protocol rests on the Proof-of-Work, nourishes a heated debate. The underlying issue lies in a highly energy-consuming process, defined as mining, required to validate crypto-asset transactions. Mining is the process of solving a cryptographic puzzle, incentivized by the possibility of gaining a reward. The higher the number of users performing mining, i.e. miners, the higher the overall electricity consumption of a blockchain. For that reason, mining constitutes a negative environmental externality. Here, we study whether miners’ interests can meet the collective need to curb energy consumption. To this end, we introduce the Crypto-Asset Game, namely a model based on the framework of Evolutionary Game Theory devised for studying the dynamics of a population whose agents can play as crypto-asset users or as miners. The proposed model, studied via numerical simulations, reveals a rich spectrum of possible steady states. Interestingly, by setting the miners’ reward in the function of the population size, agents reach a strategy profile that optimizes global energy consumption. To conclude, can a Proof-of-Work-based blockchain become energetically sustainable? Our results suggest that blockchain protocol parameters could have a relevant role in the global energy consumption of this technology.
... Because of this inefficiency, it is difficult to make forward-looking valuation and to engage in future contracts when goods are priced in Bitcoin. Relative to alternative forms of payment, such as cash and credit cards, Bitcoin has higher transaction costs, as mining of tokens is costly and users have to utilize exchanges to receive tokens before engaging in any transactions (Thum, 2018, Stoll et al., 2019. The exchanges, such as Coinbase and Binance.US serve as trusted third-party in the network. ...
Is Bitcoin the payment system of the future? This chapter argues that Bitcoin is neither a currency nor gold, but that it is a tradable asset and an alternative form of investment. Bitcoin also exhibits some features as an investment asset that are similar to collectibles. The true value of Bitcoin lies not in its speculative nature but in the embedded technology which has the long-term potential of revolutionizing traditional finance. Blockchain technology can provide solutions to Big Data challenges and provide an off-ramp during political uncertainty. Bitcoin's long-term survivability and viability as an asset will largely depend on its diversification role, institutional adoption, tax treatment and regulations.
... It is claimed that just BTC mining is responsible for 0.5 percent of global electricity consumption [11]. Marcel Thum [12] believes that cryptocurrency mining is a waste of resources. It is claimed the BTC itself might consume as much energy as all global data centers [13]. ...
Due to the impressive growth in digital coins trading, most cryptocurrencies' market cap has increased drastically. Therefore, more people are engaged in the mining process, causing a significant increase in electrical power consumption. To make cryptocurrency technology sustainable, using renewables such as photovoltaic solar power, wind energy, tidal power, geothermal power, hydroelectric power, fuel cell, and biomass has been implemented. Moreover, to decrease electrical power consumption in the cooling process of mining systems and computers, using phase change material (PCM) has been recommended. Since the cryptocurrency mining process is very competitive, only those miners will survive who employ the most competitive mining systems and benefit from the lowest electrical power costs. While the profitability of renewable electricity-based mining is lower than grid-based mining, the latter method compensates for better sustainability in cryptocurrency and lower environmental costs. This paper reviews the possible ways to make the cryptocurrency mining process clean and environmentally friendly.
... The probability of a miner winning the block's mining contest (i.e. the right to record a new block on the ledger and collect the mining reward) depends on a miner's computer power devoted for each block relative to the computer power of other miners. Following the mining models of Thum (2018), Budish (2018) and Ciaian et al. (2021), the total equilibrium computer power devoted to Bitcoin mining can be expressed as: 8 ...
We study to what extent the Bitcoin blockchain security permanently depends on the underlying distribution of cryptocurrency market outcomes. We use daily blockchain and Bitcoin data for 2014-2019 and employ the ARDL approach. We test three equilibrium hypotheses: (i) sensitivity of the Bitcoin blockchain to mining reward; (ii) security outcomes of the Bitcoin blockchain and the proof-of-work cost; and (iii) the speed of adjustment of the Bitcoin blockchain security to deviations from the equilibrium path. Our results suggest that the Bitcoin price and mining rewards are intrinsically linked to Bitcoin security outcomes. The Bitcoin blockchain security's dependency on mining costs is geographically differenced - it is more significant for the global mining leader China than for other world regions. After input or output price shocks, the Bitcoin blockchain security reverts to its equilibrium security level.
... The Bitcoin proof of work is very costly economically (Thum, 2018) and environmentally (Stoll et al., 2019). Technological improvements over the years have made hashing a very efficient operation, consuming at little as 0.03 joules per billion hashes (with specifically-designed Application-Specific Integrated Circuit, ASIC, machines. ...
The Bitcoin network is burning a large amount of energy for mining. In this paper, we estimate the lower bound for the global mining energy cost for a period of 10 years from 2010 to 2020, taking into account changes in energy costs, improvements in hashing technologies and hashing activity. We estimate energy cost for Bitcoin mining using two methods: Brent Crude oil prices as a global standard and regional industrial electricity prices weighted by the share of hashing activity. Despite a 10-billion-fold increase in hashing activity and a 10-million-fold increase in total energy consumption, we find the cost relative to the volume of transactions has not increased nor decreased since 2010. This is consistent with the perspective that, in order to keep the Blockchain system secure from double spending attacks, the proof or work must cost a sizable fraction of the value that can be transferred through the network. We estimate that in the Bitcoin network this fraction is of the order of 1%.
... Most popular consensus protocols, such as Proof of Work (PoW) [1,2] and Proof of Stake (PoS) [3,4] resemble a rent-seeking contest [5,6] for the right to create the next block. The contest usually consists of selecting a participant from a population of miners, proportional to a costly sacrifice they have made, such as hashrate in PoW or stake in PoS. ...
We propose a novel consensus protocol based on a hybrid approach, that combines a directed acyclic graph (DAG) and a classical chain of blocks. This architecture allows us to enforce collective block construction, minimising the monopolistic power of the round-leader. In this way, we decrease the possibility for collusion among senders and miners, as well as miners themselves, allowing the use of more incentive compatible and fair pricing strategies. We investigate these possibilities alongside the ability to use the DAG structure to minimise the risk of transaction censoring. We conclude by providing preliminary benchmarks of our protocol and by exploring further research directions.
... The Bitcoin proof of work is very costly economically (Thum, 2018) and environmentally (Stoll et al., 2019). Technological improvements over the years have made hashing a very efficient operation, consuming at little as 0.03 joules per billion hashes (with specifically-designed Application-Specific Integrated Circuit, ASIC, machines. ...
The Bitcoin network is burning a large amount of energy for mining. In this paper, we estimate the lower bound for the global mining energy cost for a period of 10 years from 2010 to 2020, taking into account changes in energy costs, improvements in hashing technologies and hashing activity. We estimate energy cost for Bitcoin mining using two methods: Brent Crude oil prices as a global standard and regional industrial electricity prices weighted by the share of hashing activity. Despite a 10-billion-fold increase in hashing activity and a 10-million-fold increase in total energy consumption, we find the cost relative to the volume of transactions has not increased nor decreased since 2010. This is consistent with the perspective that, in order to keep the Blockchain system secure from double spending attacks, the proof or work must cost a sizable fraction of the value that can be transferred through the network. We estimate that in the Bitcoin network this fraction is of the order of 1%.
... However, existing blockchain technologies suffer from important economic limitations. The underlying proof-of-work (PoW) consensus mechanism that ensures correctness/trust poses inefficient levels of cost that grow linearly with the size of the system (Abadi and Brunnermeier (2018); Budish (2018); Thum (2018)). In terms of scalability, binding technological capacity constraints limit the ability of current systems to process new record entries at levels that would make them suitable for widespread use. ...
We argue that recent developments in proof-of-work consensus mechanisms can be used in accordance with advancements in formal verification techniques to build a distributed payment protocol that addresses important economic drawbacks from cost efficiency, scalability and adaptablity common to current decentralized record-keeping systems. We enable the protocol to autonomously adjust system throughput according to a feasibly computable statistic - system difficulty. We then provide a formal economic analysis of a decentralized market place for record-keeping that is consistent with our protocol design and show that, when block rewards are zero, the system admits stable, self-regulating levels of transaction fees and wait-times across varying levels of demand. We also provide an analysis of the various technological requirements needed to instantiate such a system in a commercially viable setting, and identify relevant research directions.
... The former could change every few months and so prove challenging for miners to keep pace without capital investment. The contemporary environment, however, is no longer subject to these same pressures which have shifted instead to a constant downward pressure on operating costs [13] [14]. ...
Bitcoin (BTC) [1] is a decentralised crypto currency where transactions are made by broadcasting the intention to transact to volunteer "miners" around the world. These miners then compete to create a cryptographic signature which proves the transaction (and others) is valid and was initiated by a party in control of the funds. This signature and the transactions are then permanently committed to history on the blockchain. These miners are rewarded for the work of creating the signature with a fixed quantity of Bitcoin, the amount of which halves approximately every four years. This called a "Halving" or "Halvening". The next is predicted to occur in May 2020, and will result in the block reward reducing from 12.5 BTC per block to 6.25 BTC. This could have significant impact on mining profitability, the price of Bitcoin, liquidity and global transaction volume as this event will reduce the global revenue of mining by $7.3M USD (equivalent) per day. Some experts, analysts, and popular commentators speculate this will result in a significant increase in the price of Bitcoin, possibly more than doubling it over 12 months. This could add $146.6B USD equivalent at the current Bitcoin market capitalization. The Bitcoin experiment has thus far been an interesting study into the viability of an unregulated, unbacked currency. The consequences of this Halving are likely to give hints about the long-term future of Bitcoin as this is the first Halving which puts a significant percentage of miners into a non-profitable state. This study explores consequences of the Halving with a methodical approach and draws the conclusion that the price of Bitcoin could decrease in the short-term and increase in the medium-term, although unlikely to the same extent which previous Halvings have seen.
... This leads us to the topic of environmental impacts of Bitcoin (and cryptocurrency in general) mining. Thum (2018) boldly states that Bitcoin mining is a waste of resources. In a more detailed treatment, Mora et al. (2018) suggest that Bitcoin mining could contribute to global warming and by itself increase temperatures by two degrees centigrade within less than three decades. ...
Bitcoin as a major cryptocurrency has come up as a shooting star of the 2017 and 2018 headlines. After exploding its price twenty times just in the twelve months of 2017, the tone has changed dramatically in 2018 after major price corrections and increasing concerns about its mining power consumption and overall sustainability. The dynamics and interaction between Bitcoin price and its mining costs have become of major interest. Here we show that these two quantities are tightly interconnected and they tend to a common long-term equilibrium. Mining costs adjust to the cryptocurrency price with the adjustment time of several months up to a year. Current developments suggest that we have arrived at a new era of Bitcoin mining where marginal (electricity) costs and mining efficiency play the prime role. Presented results open new avenues towards interpreting past and predicting future developments of the Bitcoin mining framework and their main possible directions are outlined and discussed here as well.
... The literature of virtual assets is a topic that has grown due to its applications as a means of payment and as an investment asset. Thum (2018) points out that the unusual behavior of growth and the immediate drop in the price of Bitcoin generates a great uncertainty and dispute over whether this behavior could be due to speculative bubbles in the cryptocurrencies. ...
El objetivo de esta investigación es analizar la presencia de burbujas financieras o un comportamiento explosivo en cuatro criptomonedas: Ethereum, Ripple, Bitcoin Cash y EOS. La selección de los activos se basó en la capitalización de mercado. La metodología implementada fue una prueba simple y generalizada (SADF y GSADF) de una variación de la prueba aumentada de Dickey-Fuller propuesta por Phillips et al. (2011, 2015). Encontramos diez, siete, seis y siete comportamientos exuberantes en los activos mencionados, respectivamente. Esta metodología ha sido en gran parte inexplorada y podría emplearse de manera estándar en el sector financiero para cualquier otro activo. Esta es la primera investigación que detecta este tipo de comportamiento para un grupo de criptomonedas con frecuencia diaria. Con el presente trabajo y el artículo de Li et al. (2018), el 68,47% del mercado ha sido analizado bajo la metodología. En consecuencia, este comportamiento podría estar disperso en todo el sector.
... The evolution of Bitcoin mining hardware from CPUs to ASICs (Application Specific Integrated Circuits) has resulted in more energy efficient hardware [4]. However, the energy consumption for a single Bitcoin transaction in December 2017 amounted to 259 KWh, which is more than one US household's weekly energy consumption [10]. ...
Bitcoin is the world's most successful digital currency. It uses a public distributed ledger called the blockchain to maintain the transaction history in the network. It employs a Proof-of-Work (PoW) protocol for miners to add more blocks of transactions to the chain in order to arrive at a consensus of the state of the network. Due to the nature of the consensus mechanism used, miners are not given any sense of their progression when solving a PoW problem. The only strategy presented to them is a brute-force search where it is unknown to them how far away they or other miners are to a solution, and if the problem is worth dedicating further resources to. This results in a slow and highly energy inefficient consensus protocol. In this paper we present an alternative PoW mechanism which introduces the idea of progression when solving such puzzles. This Alt-PoW mechanism gives participants a network view of how all other miners are faring in the block finding process, so they can decide whether it is in their interest to withdraw from a block race or to continue dedicating their resources towards it. We also present a mechanism to allow for multiple interconnected chains as opposed to a single blockchain, so that block finding can be parallelized. Participants can decide which chain to dedicated their resources to, based on which has the best chance of them being successful mining on at any particular time. We show that this results in a faster and more energy efficient protocol.
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