Quantitative Risk Assessment of Bitcoin's Proof-of-Work Security Model

We present a quantitative framework for assessing systemic risks in Bitcoin's Proof-of-Work (PoW) security model through four interconnected simulation models. Our analysis examines (1) miner capitulation dynamics under price stress with difficulty adjustment feedback, (2) blockchain content pollution via Ordinals and OP_RETURN abuse with fee-market dampening, (3) hashrate concentration and censorship resistance, and (4) institutional exit cascades triggered by compliance concerns using Almgren-Chriss optimal execution modeling. Results indicate critical vulnerabilities: a Nakamoto Coefficient of only 3, content pollution approaching ~40% saturation (down from earlier estimates after incorporating fee-market dynamics), and a potential institutional exit cascade scenario. We employ a continuous-time partial adjustment for the Difficulty Adjustment Algorithm (DAA) to capture the stabilizing feedback of difficulty reduction during miner capitulation events. Additionally, the growing trend of Bitcoin miners pivoting to AI/HPC hosting (e.g., TeraWulf with Google Cloud, Core Scientific with CoreWeave) introduces a structural shift in miner economics that reduces hashrate concentration risk while increasing the vulnerability of pure-play BTC miners. These findings suggest that Bitcoin's security guarantees may be more fragile than commonly assumed, though endogenous stabilization mechanisms (difficulty adjustment, fee markets) provide meaningful resilience.