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The Economics of Consensus in Algorand

Author

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  • Nicola Dimitri

    (Department of Economics and Statistics, University of Siena, Piazza San Francesco 7, 53100 Siena, Italy)

Abstract

In the paper we investigate consensus formation, from an economic perspective, in a Proof-of-Stake (PoS) based platform inspired by the Algorand blockchain. In particular, we consider PoS in relation to governance, focusing on two main issues. First we discuss alternative sampling schemes, which can be adopted to select voting committees and to define the number of votes of committee members. The selection probability is proportional to one’s stake and increases with it. Participation in governance allows users to affect the platform’s decisions as well as to obtain a reward. Then, based on such preliminary analysis, we introduce a microeconomic model to investigate the optimal stake size for a generic user. In the model we conceptualize an optimal stake, for a user, as striking the balance between having Algos immediately available for transactions and setting aside currency units to increase the probability of becoming a committee member. Our main findings suggest that the optimal stake can be quite sensitive to the user’s preferences and to the rules for selecting committees. We believe the findings may support policy decisions in PoS based platforms.

Suggested Citation

  • Nicola Dimitri, 2022. "The Economics of Consensus in Algorand," FinTech, MDPI, vol. 1(2), pages 1-16, May.
    • Handle: RePEc:gam:jfinte:v:1:y:2022:i:2:p:13-179:d:825134
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    References listed on IDEAS

    as
    1. Ioanid Roşu & Fahad Saleh, 2021. "Evolution of Shares in a Proof-of-Stake Cryptocurrency," Management Science, INFORMS, vol. 67(2), pages 661-672, February.
    2. Nicolas Houy, 2014. "It will cost you nothing to "kill" a proof-of-stake crypto-currency," Economics Bulletin, AccessEcon, vol. 34(2), pages 1038-1044.
    3. Jacob D. Leshno & Philipp Strack, 2020. "Bitcoin: An Axiomatic Approach and an Impossibility Theorem," American Economic Review: Insights, American Economic Association, vol. 2(3), pages 269-286, September.
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