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The blockchain folk theorem

Biais, Bruno, Bisière, Christophe, Bouvard, Matthieu and Casamatta, Catherine (2019) The blockchain folk theorem. The Review of Financial Studies, 32 (5). pp. 1662-1715.

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Blockchains are distributed ledgers, operated within peer-to-peer networks. We model the proof-of-work blockchain protocol as a stochastic game and analyze the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.

Item Type: Article
Language: English
Date: May 2019
Refereed: Yes
JEL Classification: C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
G2 - Financial Institutions and Services
L86 - Information and Internet Services; Computer Software
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 12 Sep 2018 14:34
Last Modified: 27 Aug 2020 08:35
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