IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/115618.html
   My bibliography  Save this paper

Corporate capture of blockchain governance

Author

Listed:
  • Ferreira, Daniel
  • Li, Jin
  • Nikolowa, Radoslawa

Abstract

We develop a theory of blockchain governance. In our model, the proof-of-work system, the most common set of rules for validating transactions in blockchains, creates an industrial ecosystem with specialized suppliers of goods and services. We analyze the interactions between blockchain governance and the market structure of the industries in the blockchain ecosystem. We show that the proof-of-work system may lead to a situation in which some large firms in the blockchain industrial ecosystem—blockchain conglomerates—capture the governance of the blockchain.

Suggested Citation

  • Ferreira, Daniel & Li, Jin & Nikolowa, Radoslawa, 2023. "Corporate capture of blockchain governance," LSE Research Online Documents on Economics 115618, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:115618
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/115618/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    2. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    3. Joseph Farrell & Michael L. Katz, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    4. Makarov, Igor & Schoar, Antoinette, 2020. "Trading and arbitrage in cryptocurrency markets," Journal of Financial Economics, Elsevier, vol. 135(2), pages 293-319.
    5. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    6. Lin William Cong & Zhiguo He & Jiasun Li & Wei Jiang, 2021. "Decentralized Mining in Centralized Pools [Concentrating on the fall of the labor share]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1191-1235.
    7. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
    8. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    9. Ioanid Roşu & Fahad Saleh, 2021. "Evolution of Shares in a Proof-of-Stake Cryptocurrency," Management Science, INFORMS, vol. 67(2), pages 661-672, February.
    10. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    11. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    12. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-298, March.
    13. Thomas H. Noe, 2002. "Investor Activism and Financial Market Structure," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 289-318, March.
    14. Budish, Eric B., 2018. "The Economic Limits of Bitcoin and the Blockchain," Working Papers 279, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    15. Albert S. Hu & Christine A. Parlour & Uday Rajan, 2019. "Cryptocurrencies: Stylized facts on a new investible instrument," Financial Management, Financial Management Association International, vol. 48(4), pages 1049-1068, December.
    16. Winton, Andrew, 1993. "Limitation of Liability and the Ownership Structure of the Firm," Journal of Finance, American Finance Association, vol. 48(2), pages 487-512, June.
    17. Marco Pagano & Ailsa Röell, 1998. "The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 187-225.
    18. Doron Levit & Nadya Malenko, 2011. "Nonbinding Voting for Shareholder Proposals," Journal of Finance, American Finance Association, vol. 66(5), pages 1579-1614, October.
    19. June Ma & Joshua S. Gans & Rabee Tourky, 2018. "Market Structure in Bitcoin Mining," NBER Working Papers 24242, National Bureau of Economic Research, Inc.
    20. Easley, David & O'Hara, Maureen & Basu, Soumya, 2019. "From mining to markets: The evolution of bitcoin transaction fees," Journal of Financial Economics, Elsevier, vol. 134(1), pages 91-109.
    21. Gur Huberman & Jacob D Leshno & Ciamac Moallemi, 2021. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System [Blockchain Economics]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 3011-3040.
    22. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    23. Makarov, Igor & Schoar, Antoinette, 2020. "Trading and arbitrage in cryptocurrency markets," LSE Research Online Documents on Economics 100409, London School of Economics and Political Science, LSE Library.
    24. repec:bla:jindec:v:48:y:2000:i:4:p:413-32 is not listed on IDEAS
    25. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    26. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 693-728.
    27. Benito Arruñada & Luis Garicano, 2018. "Blockchain: The birth of decentralized governance," Economics Working Papers 1608, Department of Economics and Business, Universitat Pompeu Fabra.
    28. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    29. repec:bla:jfinan:v:53:y:1998:i:1:p:65-98 is not listed on IDEAS
    30. Fahad Saleh & Wei Jiang, 2021. "Blockchain without Waste: Proof-of-Stake [Proof of Work vs Proof of Stake]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1156-1190.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Campbell R. Harvey & Daniel Rabetti, 2024. "International business and decentralized finance," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(7), pages 840-863, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ferreira, Daniel & Li, Jin & Nikolowa, Radoslawa, 2019. "Corporate Capture of Blockchain Governance," CEPR Discussion Papers 13493, C.E.P.R. Discussion Papers.
    2. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    3. Michael Sockin & Wei Xiong, 2023. "Decentralization through Tokenization," Journal of Finance, American Finance Association, vol. 78(1), pages 247-299, February.
    4. Hokkanen, Topi, 2023. "Externalities and market failures of cryptocurrencies," BoF Economics Review 4/2023, Bank of Finland.
    5. Mike Burkart & Samuel Lee, 2022. "Activism and Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1868-1896.
    6. Hinzen, Franz J. & John, Kose & Saleh, Fahad, 2022. "Bitcoin’s limited adoption problem," Journal of Financial Economics, Elsevier, vol. 144(2), pages 347-369.
    7. Matteo Benetton & Giovanni Compiani, 2024. "Investors’ Beliefs and Cryptocurrency Prices," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 197-236.
    8. Makarov, Igor & Schoar, Antoinette, 2021. "Blockchain analysis of the Bitcoin market," LSE Research Online Documents on Economics 118897, London School of Economics and Political Science, LSE Library.
    9. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    10. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    11. Nick Arnosti & S. Matthew Weinberg, 2022. "Bitcoin: A Natural Oligopoly," Management Science, INFORMS, vol. 68(7), pages 4755-4771, July.
    12. Igor Makarov & Antoinette Schoar, 2021. "Blockchain Analysis of the Bitcoin Market," NBER Working Papers 29396, National Bureau of Economic Research, Inc.
    13. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
    14. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    15. Alon Benhaim & Brett Hemenway Falk & Gerry Tsoukalas, 2021. "Scaling Blockchains: Can Committee-Based Consensus Help?," Papers 2110.08673, arXiv.org, revised Dec 2022.
    16. Li, Zhicheng & Li, Jialong & Zhou, Ke, 2023. "Bitcoin transaction fees and the decentralization of Bitcoin mining pools," Finance Research Letters, Elsevier, vol. 58(PB).
    17. Li Guo & Wolfgang Karl Härdle & Yubo Tao, 2024. "A Time-Varying Network for Cryptocurrencies," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 42(2), pages 437-456, April.
    18. Emiliano S Pagnotta, 2022. "Decentralizing Money: Bitcoin Prices and Blockchain Security," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 866-907.
    19. Jacob D. Leshno & Elaine Shi & Rafael Pass, 2024. "On the Viability of Open-Source Financial Rails: Economic Security of Permissionless Consensus," Papers 2409.08951, arXiv.org.
    20. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    governance; blockchain conglomerates; industrial ecosystem; proof-of-work;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:115618. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.