Abstract
A blockchain’s well-functioning relies on proper incentives under adequate decentralization. However decentralization cannot be taken for granted, as many presumably distributed cryptocurrency-mining activities have witnessed the rise of mining pools over time. We study the centralization and decentralization forces in the creation and competition of mining pools: risk-sharing benefits attract independent miners to pools, leading to centralization; however, pool concentration can be moderated through cross-pool diversification and endogenous pool fees. In particular, we show that larger pools
charge higher fees, leading to disproportionally less miners to join and thus a slower pool size growth. Empirical evidence from Bitcoin mining supports our model predictions.