Modeling and Simulation of the Economics of Mining in the Bitcoin Market

Abstract

In January 3, 2009, Satoshi Nakamoto gave rise to the “Bitcoin Blockchain”, creating the first block of the chain hashing on his computer’s central processing unit (CPU). Since then, the hash calculations to mine Bitcoin have been getting more and more complex, and consequently the mining hardware evolved to adapt to this increasing difficulty. Three generations of mining hardware have followed the CPU’s generation. They are GPU’s, FPGA’s and ASIC’s generations. This work presents an agent-based artificial market model of the Bitcoin mining process and of the Bitcoin transactions. The goal of this work is to model the economy of the mining process, starting from GPU’s generation, the first with economic significance. The model reproduces some “stylized facts” found in real-time price series and some core aspects of the mining business. In particular, the computational experiments performed can reproduce the unit root property, the fat tail phenomenon and the volatility clustering of Bitcoin price series. In addition, under proper assumptions, they can reproduce the generation of Bitcoins, the hashing capability, the power consumption, and the mining hardware and electrical energy expenditures of the Bitcoin network.

Banking on Blockchain: Costs Savings Thanks to the Blockchain Technology

“…Results similar to those by Czarnek for the Bitcoin system emerge also from other works, such as that by [25], who simulate an artificial Bitcoin market, and that by [37], who wrote:…”

“…To increase the probability of winning the reward and creating a block, miners have to participate in an arms race (see work by [25] for more details), that makes prohibitively high the cost of a possible attack, but that makes at the same time the Bitcoin protocol ecologically unfriendly. As a result, alternative mechanisms of block mining that are much less resource intensive have been proposed.…”

“…Adopting the same approach used by [25], based on the fitting curve of the hash rate per US$[H/(s*$)], R(t) and on that of the power consumption [W/H/s] P(t) (defined in the next section), in this work, we compute the electricity and hardware expenditures supported by the Bitcoin mining network over time, from 30 September 2010 to 31 December 2016. We estimated these expenditures dividing the real total hash rate in the network by R(t).…”

“…In order to be able compute these measures, we started by gathering information about the mining hardware that entered the market over time, as in work by [25].…”

Bitcoin System

“…O'Dwyer and Malone (2014) deal with environmental aspects of miners' competition. Cocco and Marchesi, M. (2016) deal with economic modelling of mining in the Bitcoin system. Eyal and Sirer (2014) deal with the reliability of mining and warn that the Bitcoin system is vulnerable if the proportion of unfair miners exceeds 1/3.…”