Bitcoin: A Natural Oligopoly

Nick Arnosti () and S. Matthew Weinberg ()
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Nick Arnosti: Department of Industrial and Systems Engineering, University of Minnesota, Minneapolis, Minnesota 55455
S. Matthew Weinberg: Department of Computer Science, Princeton University, Princeton, New Jersey 08540

Management Science, 2022, vol. 68, issue 7, 4755-4771

Abstract: We argue that the concentrated production and ownership of Bitcoin mining hardware arise naturally from the economic incentives of Bitcoin mining. We model Bitcoin mining as a two-stage competition; miners compete in prices to sell hardware while competing in quantities for mining rewards. We characterize equilibria in our model and show that small asymmetries in operational costs result in highly concentrated ownership of mining equipment. We further show that production of mining equipment will be dominated by the miner with the most efficient hardware, who will sell hardware to competitors while possibly also using it to mine.

Keywords: economics; game theory and bargaining theory; Bitcoin; proof of work; cryptocurrency (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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