Review of Financial Studies Vol. 32 No. 5 2019

The Blockchain Folk Theorem

Bruno Biais¹; Christophe Bisière²; Matthieu Bouvard³; Catherine Casamatta²

¹ Toulouse School of Economics, CNRS, Université Toulouse Capitole, TSM-R and HEC Paris · ² Toulouse School of Economics, Université Toulouse Capitole, TSM-R · ³ Desautels Faculty of Management, McGill University ,

Abstract

Blockchains are distributed ledgers, operated within peer-to-peer networks. We model the proof-of-work blockchain protocol as a stochastic game and analyze 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.Received May 31, 2017; editorial decision July 6, 2018 by Editor Itay Goldstein.

DOI

10.1093/rfs/hhy095

Volume

32

Issue

5

Pages

1662-1715

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓