Modeling the Dynamics of Bitcoin Overlay Network

The world economy is experiencing the novel adoption of distributed currencies that are free from the control of central banks. Distributed currencies suffer from extreme volatility, and this can lead to catastrophic implications during future economic crisis. Understanding the dynamics of this new type of currencies is vital for empowering supervisory bodies to behave proactively as well-informed planners rather than reactively as incident responders. Bitcoin, the first and dominant distributed cryptocurrency, is still notoriously vague, especially for a financial instrument with market value exceeding $1 trillion. Modeling the Bitcoin Overlay Network poses a number of important theoretical and methodological challenges. This drastically undermines the ability to predict key features such as network’s resilience. In this work, we developed Evolutionary Random Graph, a theoretical model that describes the network of bitcoin miners. The correctness of this model has been validated using real and simulated bitcoin data.