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

This paper analyzes PoW blockchain network's long-term cost ef- ficiency and short-term stability. Our equilibrium model builds upon the optimization problems of blockchain users and miners, and allows us to simultaneously determine token price, network hashrate, and user transaction fee. We prove that transaction fee bidding mechanism creates two types of welfare loss in the long- term: over-competition among users leads to excessive transaction fee payment; failure to realize fee's positive externality on network security in user fee decision making also leads to a non-optimal fee level. By studying short-term feedback loop between network hashrate and miner income, we also prove that the network over- corrects itself and diverges when subject to a hashrate shock. We conclude that it has unstable equilibrium