Paper - BitCoin is unstable without the fixed block reward (game theory)


I just found this paper from two years ago, but I think it’s quite relevant to crypto and Cardano in general since almost every currency hopes to move from fixed block rewards to ‘transaction fees only’ in the future. Basically this paper shows that without the fixed block reward in BitCoin, that proof of work using only transaction fee’s results in a very unstable/insecure network as miners start engaging in all kinds of aberrant behaviour due to the lack of fixed reward.

I tie this to Cardano, b/c staking is scheduled to have fixed rewards for a while that then eventually move to all transaction fees. B/c Cardano is on a fixed timeframe for blocks rather than an approximation like PoW, Cardano may avoid this but the issue should definitely be considered by IOHK imo since Cardano hopes to eventually move away from fixed rewards to transaction fees in the long term .

This paper argues that bitcoin (and by abstraction almost all crypto) will need to stick to fixed rewards and accept inflation or else have an insecure network…

"We also show rigorously that selfish mining gets worse when block rewards are replaced by transaction fees, motivated by the following intuition: if you happen to mine a new block just seconds after the last one was found, you gain nothing by publishing, so you might as well keep it for selfish mining in case you get lucky. The variance in transaction fees enables strategies like this that simply don’t make sense when the block reward is fixed.

If miners switch to these deviant strategies, the blockchain will be much less secure because of the mining power wasted due to constant forking, undercutting, and withholding of found blocks.

At a deeper level, our results suggest a fundamental rethinking of the role of block rewards in cryptocurrency design. The prevailing view is that the block reward is a necessary but temporary evil to achieve an initial allocation of coins in the absence of a central authority. The transaction-fee regime is seen as the ideal steady state of the system. But our work shows that incentivizing compliant miner behavior in the transaction fee regime is a significantly more daunting task than in the block reward regime. So perhaps designers of new cryptocurrencies should make the block reward permanent and accept monetary inflation as inevitable. Transaction fees would still exist, but merely as an incentive for miners to include transactions in their blocks."


Thank you very much for the paper! It is interesting read indeed. But:

Selfish mining is not relevant in Ouroboros, since, as you mentioned, the fixed time-slots. And these slots are actually solve a lot of possible problems. So most of possible vulnerabilities know for other systems are just irrelevant in Ouroboros, which is why it’s awesome and exactly why, I think they developed it like this :slight_smile:

But still thank you for the paper! Knowing all this stuff is still a good thing for anyone interested.

UPD: Just for context - this whole thread: