An Economic Analysis of Difficulty Adjustment Algorithms in Proof-of-Work Blockchain Systems

@article{Noda2019AnEA,
  title={An Economic Analysis of Difficulty Adjustment Algorithms in Proof-of-Work Blockchain Systems},
  author={Shunya Noda and Kyohei Okumura and Yoshinori Hashimoto},
  journal={Monetary Economics: Financial System \& Institutions eJournal},
  year={2019}
}
The design of the Bitcoin difficulty adjustment algorithm (DAA) is vulnerable as it dismisses miners’ responses to policy changes. We develop an economic model of the Proof-of-Work blockchain system. Our model allows miners to pause operation when it is not profitable. Hence, the supply of aggregate hash power can be elastic in the cryptocurrency price and the difficulty of the mining puzzle. We prove that, when the hash supply is elastic, the Bitcoin DAA fails to stabilize the block arrival… Expand

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