Analyzing the Economic Impact of Decentralization on Users

TL;DR

This paper models the economic effects of decentralization in blockchain systems through a two-stage game, analyzing equilibrium conditions, market dynamics, and the influence of block rewards on user prices.

Contribution

It introduces a novel game-theoretic model of decentralized ledger pricing, characterizes equilibrium existence, and links decentralization measures to market outcomes.

Findings

Pure equilibria may not always exist.

Market-clearing equilibrium is unique under certain conditions.

Higher block rewards can facilitate equilibrium existence.

Abstract

We model the ultimate price paid by users of a decentralized ledger as resulting from a two-stage game where Miners (/Proposers/etc.) first purchase blockspace via a Tullock contest, and then price that space to users. When analyzing our distributed ledger model, we find: - A characterization of all possible pure equilibria (although pure equilibria are not guaranteed to exist). - A natural sufficient condition, implied by Regularity (a la [Mye81]), for existence of a ''market-clearing'' pure equilibrium where Miners choose to sell all space allocated by the Distributed Ledger Protocol, and that this equilibrium is unique. - The market share of the largest miner is the relevant ''measure of decentralization'' to determine whether a market-clearing pure equilibrium exists. - Block rewards do not impact users' prices at equilibrium, when pure equilibria exist. But, higher block rewards can cause pure equilibria to exist. We also discuss aspects of our model and how they relate to blockchains deployed in practice. For example, only ''patient'' users (who are happy for their transactions to enter the blockchain under any miner) would enjoy the conclusions highlighted by our model, whereas ''impatient'' users (who are interested only for their transaction to be included in the very next block) still face monopoly pricing.