Important arguments for Peercoin in this Princeton paper:
Bitcoin provides two incentives for miners: block rewards and transaction fees. The former accounts for the vast majority of miner revenues at the beginning of the system, but it is expected to transition to the latter as the block rewards windle. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the block chain. We show that this is not the case. Our key insight is that with only transaction fees, the variance of the block reward is
very high due to the exponentially distributed block arrival time, and it becomes attractive to fork a “wealthy” block to “steal” the rewards therein. We show that this results in an equilibrium with undesirable properties for Bitcoin’s security and performance, and even non-equilibria in some
circumstances. We also revisit selfish mining and show that it can be made profitable for a miner with an arbitrarily lowhash power share, and who is arbitrarily poorly connected within the network. Our results are derived from theoretical analysis and confirmed by a new Bitcoin mining simulator
that may be of independent interest. We discuss the troubling implications of our results for
Bitcoin’s future security and draw lessons for the design of new cryptocurrencies.
We have argued that deviant mining strategies in a transactionfee regime could hurt the stability of Bitcoin mining and harm the ecosystem. In a block chain with constant forks caused by undercutting, an attacker’s effective hash power is magnified because he will always mine to extend his own
blocks whereas other miners are not unified. This would make a “51%” attack possible with much less than 51% of the hash power.
Our results suggest a different view. We see the block reward as integral to the stability of the mining game. At a minimum, analyzing equilibria in the transaction-fee regime appears dramatically harder than in the block-reward regime, which is a cause for concern by itself. The monetary inflation resulting from making the block reward permanent, as Ethereum does, may be a small price to pay to ensure the stability of a cryptocurrency.