Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.
blockchain; forks; proof-of-work; distributed ledger; multiplicity of equilibria; coordination game;
- C73: Stochastic and Dynamic Games • Evolutionary Games • Repeated Games
- G2: Financial Institutions and Services
- L86: Information and Internet Services • Computer Software
TSE Working Paper, n. 17-817, May 2017, revised January 2018