Authors: Pablo Azar and Maryam Farboodi
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Staff Reports
When Higher Stakes Weaken Security
Number 1205
September 2026
September 2026
JEL classification: G12, G28, D82
A central design goal of settlement systems is that security should not degrade when transaction values are high. Using Ethereum’s Proof-of-Work era, we show that Proof-of-Work can fail this test: higher transaction fees—the reward for a successful attack—cause miners to deviate from honest behavior and fork the chain, undermining settlement finality when it is most needed. We exploit a unique feature of Ethereum’s Proof-of-Work era that records, for each fork, both the winning block and its displaced competitor’s timestamp. We jointly instrument hourly mean log fees, hashrate, and block size using a crypto shock indicator constructed from Ethereum hacks, market crises, and regulatory events, together with one-hour lags of hashrate and block size. Higher fees significantly increase canonical blocks arriving exactly one second later than the siblings they displace, which is consistent with deviation from honest behavior. The converse event showing honest behavior—a canonical block arriving before its siblings—is not driven by high fees. This contrast indicates that fees affect equilibrium behavior and settlement finality in Proof-of-Work blockchains.
Author Disclosure Statement(s)
Pablo Daniel Azar
I want to disclose that I own 1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000 2. Less than $2000 in a Binance account.
Maryam Farboodi
The author, Maryam Farboodi, declares that she has no relevant or material financial interests that relate to the research described in this blog post.
I want to disclose that I own 1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000 2. Less than $2000 in a Binance account.
Maryam Farboodi
The author, Maryam Farboodi, declares that she has no relevant or material financial interests that relate to the research described in this blog post.
Suggested Citation:
Azar, Pablo D., and Maryam Farboodi. 2026. “When Higher Stakes Weaken Security.” Federal Reserve Bank of New York Staff Reports, no. 1205, September. https://doi.org/10.59576/sr.1205
Azar, Pablo D., and Maryam Farboodi. 2026. “When Higher Stakes Weaken Security.” Federal Reserve Bank of New York Staff Reports, no. 1205, September. https://doi.org/10.59576/sr.1205
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