An Equilibrium Model of Blockchain-Based Cryptocurrencies

This paper develops an equilibrium model of proof-of-work cryptocurrencies. Equilibrium behaviour of miners and users are characterized for exogenous blockchain protocol metrics. This paper shows that an equilibrium between miners and users can be achieved in the long run. High fixed mining rewards are the reason for instability in current cryptocurrency designs. The equilibrium model has two key implications: first, decentralisation and technological improvement in mining are drivers of low transaction fees and low mining costs in a proof-of-work cryptocurrency environment; and second, limited block size and mining difficulty create an incentive mechanism that achieves cryptocurrency sustainability in the long run.