Analyzing the Economic Impact of Decentralization on Users
Amit Levy, S. Matthew Weinberg, Chenghan Zhou

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…
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Taxonomy
TopicsBlockchain Technology Applications and Security · Auction Theory and Applications · Game Theory and Applications
