MODELING THE RELATIONSHIP BETWEEN COMPETITION AND EFFICIENCY: A CASE STUDY OF THE BITCOIN BLOCKCHAIN
Date of Award
Master of Science
Bitcoin transactions are recorded in a public ledger known as the blockchain. Critical to its security is the distributed system that maintains the blockchain, which is run by individuals known as miners. Bitcoin has a total market capitalization of 273bn US Dollars as of September 2022, and one bitcoin is exchanged at 19,000 US Dollars in the market. Despite its vast market capitalization growth and popularity since its inception, the scalability and efficiency of Bitcoin are still puzzling questions for researchers. This paper used the daily time series data from the inception until September 7, 2022, to analyze the relationship between bitcoin miners' competition and the Bitcoin blockchain's efficiency. The number of daily transactions and average block validation time were used as indicators for the system's efficiency, and the Herfindahl-Hirschman Index (HHI) of miners' hash rate is used as a proxy for mining concentration. Controlling for necessary factors, the econometric analysis in this paper shows that concentration in bitcoin mining is associated with lower system efficiency. Higher competition between miners leads to a higher number of Bitcoin transactions and a lower block validation time.
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