Proof-of-Work (PoW) Blockchain Network and Its Viability as a Payment System

This paper analyzes PoW blockchain network’s economic environment and examines its cost, efficiency, and short-term stability as a payment system. Our framework is based on the optimization problem of blockchain users and miners, and we derive an equilibrium model where token price, network hashrate, and transaction fee are simultaneously determined. We show that transaction fee in equilibrium shares similarity with traditional payment systems. We then prove that PoW blockchain provides higher social welfare level than payment system under monopoly, but is not social optimal due to transaction fee over competition and user’s failure to consider transaction fee’s positive externality on network hashrate. We also show that a higher transaction capacity can benefit PoW blockchain network and its participants. Lastly, we analyze the inter-temporal feedback loop between network hashrate and miner income, and demonstrate blockchain network’s short-term impulse response to exogenous hashrate shock. We conclude that PoW-based blockchain network has unstable equilibrium.