Collusion Among Bitcoin Mining Pools

Abstract

One of the most striking financial developments of the last five years involves the emergence and rapid adoption of digital currencies, with Bitcoin being the most prominent. This paper seeks to determine whether there is evidence of collusion between mining pools (coalitions of individuals that verify transactions for monetary returns). We first constructed a theoretical framework which modeled the mining activity as an infinitely repeated game between two competing pools. By devising payoffs in the form of value functions and applying the one shot deviation principle, we found that a collusive strategy was indeed an equilibrium–if certain conditions held. However, our empirical analysis offered more ambiguous results. Ultimately, our attempt to capture peer effects suggests the relationship between a mining pool and its competitors is negative and non-linear. While this could serve as evidence against collusive behavior, we also postulate alternate explanations that could account for the finding.