Interdependencies between Mining Costs, Mining Rewards and Blockchain\n Security

Abstract

This paper studies to what extent the cost of operating a proof-of-work\nblockchain is intrinsically linked to the cost of preventing attacks, and to\nwhat extent the underlying digital ledger security budgets are correlated with\nthe cryptocurrency market outcomes. We theoretically derive an equilibrium\nrelationship between the cryptocurrency price, mining rewards and mining costs,\nand blockchain security outcomes. Using daily crypto market data for 2014-2021\nand employing the autoregressive distributed lag approach - that allows\ntreating all the relevant moments of the blockchain series as potentially\nendogenous - we provide empirical evidence of cryptocurrency price and mining\nrewards indeed being intrinsically linked to blockchain security outcomes.\n