Dynamic User Competition and Miner Behavior in the Bitcoin Market

• URL: http://arxiv.org/abs/2502.15505v1
• Date: Fri, 21 Feb 2025 15:02:02 GMT
• Title: Dynamic User Competition and Miner Behavior in the Bitcoin Market
• Authors: Yuichiro Kamada, Shunya Noda,
• Abstract summary: We develop a dynamic model of the Bitcoin market where users set fees themselves and miners decide whether to operate and whom to validate based on those fees.<n>Our analysis reveals how, in equilibrium, users adjust their bids in response to short-term congestion.<n>We show that a block reward (a fixed reward paid to miners upon a block production) can mitigate these inefficiencies.
• Score: 0.0
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: We develop a dynamic model of the Bitcoin market where users set fees themselves and miners decide whether to operate and whom to validate based on those fees. Our analysis reveals how, in equilibrium, users adjust their bids in response to short-term congestion (i.e., the amount of pending transactions), how miners decide when to start operating based on the level of congestion, and how the interplay between these two factors shapes the overall market dynamics. The miners hold off operating when the congestion is mild, which harms social welfare. However, we show that a block reward (a fixed reward paid to miners upon a block production) can mitigate these inefficiencies. We characterize the socially optimal block reward and demonstrate that it is always positive, suggesting that Bitcoin's halving schedule may be suboptimal.

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