Abstract
Mining is one of the key features to maintain the value and the security of the Bitcoin system. Like mining of other commodities, Bitcoin mining requires a non-trivial fixed cost to enter the business. We extend a framework that captures some key features of Bitcoin to incorporate entry costs. We use the model to investigate the welfare effect of barriers to entry in Bitcoin mining. We find that barriers to entry can help to improve welfare. Our quantitative results show that this welfare gain is moderate when comparing to an economy without entry barriers. The source of welfare gains is coming from the saving in mining costs due to the reduction in competition rather than the benefit from the drop in a delayed settlement.
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