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Mechanism Design Approaches to Blockchain Consensus

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  • Joshua S. Gans
  • Richard T. Holden

Abstract

Blockchain consensus is a state whereby each node in a network agrees on the current state of the blockchain. Existing protocols achieve consensus via a contest or voting procedure to select one node as a dictator to propose new blocks. However, this procedure can still lead to potential attacks that make consensus harder to achieve or lead to coordination issues if multiple, competing chains (i.e., forks) are created with the potential that an untruthful fork might be selected. We explore the potential for mechanisms to be used to achieve consensus that are triggered when there is a dispute impeding consensus. Using the feature that nodes stake tokens in proof of stake (POS) protocols, we construct revelation mechanisms in which the unique (subgame perfect) equilibrium involves validating nodes propose truthful blocks using only the information that exists amongst all nodes. We construct operationally and computationally simple mechanisms under both Byzantine Fault Tolerance and a Longest Chain Rule, and discuss their robustness to attacks. Our perspective is that the use of simple mechanisms is an unexplored area of blockchain consensus and has the potential to mitigate known trade-offs and enhance scalability.

Suggested Citation

  • Joshua S. Gans & Richard T. Holden, 2022. "Mechanism Design Approaches to Blockchain Consensus," NBER Working Papers 30189, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30189
    Note: PR
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    References listed on IDEAS

    as
    1. Tim Roughgarden, 2021. "Transaction Fee Mechanism Design," Papers 2106.01340, arXiv.org, revised Dec 2023.
    2. Joshua S. Gans & Neil Gandal, 2021. "Consensus Mechanisms for the Blockchain," Springer Books, in: Raghavendra Rau & Robert Wardrop & Luigi Zingales (ed.), The Palgrave Handbook of Technological Finance, pages 269-286, Springer.
    3. Kfir Eliaz, 2002. "Fault Tolerant Implementation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 589-610.
    4. Joshua S. Gans, 2019. "The Fine Print in Smart Contracts," NBER Working Papers 25443, National Bureau of Economic Research, Inc.
    5. Hanna Halaburda & Zhiguo He & Jiasun Li, 2021. "An Economic Model of Consensus on Distributed Ledgers," NBER Working Papers 29515, National Bureau of Economic Research, Inc.
    6. 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.
    7. Holden,Richard & Malani,Anup, 2021. "Can Blockchain Solve the Hold-up Problem in Contracts?," Cambridge Books, Cambridge University Press, number 9781009001397, October.
    8. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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