Why fixed costs matter for proof-of-work based cryptocurrencies

Rodney Garratt, Maarten van Oordt

Research output: Working paperAcademic

Abstract

Ensuring that the record of Bitcoin transactions is secure uses a lot of computational power. Miners, who supply this power to the Bitcoin network, earn transaction fees and new bitcoins. Ultimately, though, bitcoin miners will earn only fees as the number of new bitcoins slowly declines to zero. As mining rewards wane, some experts say that Bitcoin will become vulnerable to attacks.

Will Bitcoin transactions remain secure in the future? Our analysis focuses on the fact that mining some cryptocurrencies requires investment in specialized computing hardware. We look at the impact this fixed cost has on the feasibility of a profitable double-spending attack.

We show that specialized hardware gives an added layer of protection to the Bitcoin network. As a result, things look less gloomy for the security of the Bitcoin transaction record. Smaller cryptocurrencies that rely on the same specialized hardware as larger ones may be less protected.
Original languageEnglish
Publication statusPublished - 2020

Publication series

NameBank of Canada Staff Working Paper
No.2020-27

Keywords

  • Cryptocurrency
  • Blockchain
  • Security
  • Cyberattacks
  • Payment economics

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