Empirical risk analysis of mining a Proof-of-Work blockchain
Hansjörg Albrecher, Dina Finger, Pierre-Olivier Goffard · Decisions in Economics and Finance · 2024
Abstract The process of mining blocks on a blockchain utilizing a Proof-of-Work consensus mechanism carries inherent risks, particularly when the operational expenses associated with mining exceed the rewards earned. Building on previous findings on mining in pools, this paper delves into the question of whether the theoretical formulas for the ruin probability and the expected value of future surplus obtained under particular model assumptions are indeed validated empirically. In particular, we include the presence of transactions fees in the block rewards in our analysis. We also provide algorithms to fit the involved generalized hyperexponential distributions to actual data. Moreover, we perform a sensitivity analysis for different factors of interest, and we quantify the relevance of incorporating temporal dependence and transaction fees in the model.