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

This paper analyzes the economic environment created by PoW-based blockchain network and examines its short-term stability and long-term sustainability. We build our framework based on the optimization problem of blockchain user and miner, and derive an equilibrium model where three key endogenous elements in blockchain network, namely, token price, network hashrate, and user transaction fee are simultaneously determined. We show that transaction fee in blockchain network not only shares similarity with traditional payment systems but also has potential to be a better payment method . We then prove that technology progress such as transaction capacity increase can benefit blockchain network. 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.