1/ A thread on bitcoin mining game theory.
The Bitcoin network produces approximately 54,750 bitcoin a month in block rewards.
Every month.
The Bitcoin network produces approximately 54,750 bitcoin a month in block rewards.
Every month.
2/ Assume there are only two miners (A & B), each with half the network's capacity and 38% operating margins. Each would produce 27,375 bitcoin a month (excluding transaction fees).
3/ If both increased hashrate (computing power / capacity) by 20%, they would still produce 27,375 bitcoin a month. Because mining difficulty would increase proportionally, keeping total block rewards quantity unchanged.
But their margins would decrease to 32%.
But their margins would decrease to 32%.
4/ Henceforth, miners would be spending more … to produce the same.
=> miners would have invested to increase their costs. Obviously, no relatively intelligent person would invest to increase their costs.
Bitcoin miners' are collectively incentivized not to increase hashrate.
=> miners would have invested to increase their costs. Obviously, no relatively intelligent person would invest to increase their costs.
Bitcoin miners' are collectively incentivized not to increase hashrate.
5/ Enter the Bitcoin Miners' Prisoner's Dilemma:
Assume miners' objective is to *maximize the amount of bitcoin* each produces.
Miner A could increase its hashrate by 20%, and if B doesn't do anything, A would increase production, at the expense of B.
Assume miners' objective is to *maximize the amount of bitcoin* each produces.
Miner A could increase its hashrate by 20%, and if B doesn't do anything, A would increase production, at the expense of B.
6/ What can miner B do to avoid this from happening? The same: increase hashrate itself, preemptively.
Therefore, miners, to defend their individual interests, would be both incentivized to increase hashrate and end up worse off. Doing so would reduce their margins to 26%.
Therefore, miners, to defend their individual interests, would be both incentivized to increase hashrate and end up worse off. Doing so would reduce their margins to 26%.
7/ It is in the interest of rational miners to cooperate to not increase hashrate / capacity.
However, in the absence of trust, they would choose not to cooperate, as whoever moves first, A or B, WILL end up with more bitcoin.
However, in the absence of trust, they would choose not to cooperate, as whoever moves first, A or B, WILL end up with more bitcoin.
8/ Summary
- If A and B cooperate, each mines 27,375.
- If A increases hashrate but B doesn't, A ends up with more bitcoin (and vice versa).
- If A and B both increase hashrate, each mines 27,375, wastes money in equipment, and increases operational costs.
- If A and B cooperate, each mines 27,375.
- If A increases hashrate but B doesn't, A ends up with more bitcoin (and vice versa).
- If A and B both increase hashrate, each mines 27,375, wastes money in equipment, and increases operational costs.
9/ To be continued