Dividend or No Dividend in Delegated Blockchain Governance: A Game Theoretic Analysis

Abstract

Delegated blockchain governance is the frontier of blockchain design issues that is to improve the scalability of blockchain networks. Delegated proof of stake (DPoS) blockchains such as EOS must select a few super nodes for transaction verification. In particular, the blockchain community has debated recently on whether dividend should be allowed when electing super nodes, which might be considered as unethical or unfair, leading to an open research topic and a new research gap that has theoretical value for both academia and industry. In this paper, we build a theoretical framework to study how dividend affects user decisions and welfare in a DPoS blockchain. Based on game theory, we propose a three-player Hotelling model with two policies to study the behaviors of voters and candidates. We first use a static game analysis to show that the benefits of dividend for voters and for candidates vary with the size of reward and there exists an interval, in which the zero dividend policy would be good for the welfare of both candidates and voters. Then, we use an evolutionary game analysis to examine the process dynamics of super node selection, we find that the campaign strategy of candidates has to do with the size of platform reward given to the candidates by the blockchain platform. Especially in the asymmetric case, we find that higher level of platform reward turns to benefit candidates with large number of votes even more. Our findings are instrumental for designing dividend policies in DPoS blockchains and can stimulate more potential research in blockchain governance.

Keywords

Delegated proof of stake / consensus algorithm / blockchain / Hotelling model / evolutionary game

References

[1] Adner R, Chen J, Zhu F. Frenemies in platform markets: The case of Apples iPad vs. Amazons Kindle. Management Science, 2019, 66(6): 2432-2451.

[2] Andersen JV, Bogusz CI. Self-organizing in blockchain infrastructures: Generativity through shifting objectives and forking. Journal of the Association for Information Systems, 2019, 20: 1242-1273.

[3] Beck R, Müller-Bloch C, King JL. Governance in the blockchain economy: A framework and research agenda. Journal of the Association for Information Systems, 2018, 19: 1020-1034.

[4] Bentov I, Pass R, Shi E. Snow white: Provably secure proofs of stake. IACR Cryptology ePrint Archive, 2016, 2016: 919

[5] Biodun I (2015). The trust machine. The Economist. Oct 31, 2015.

[6] Bonneau J, Miller A, Clark J, Narayanan A, Kroll JA, Felten EW (2015). SoK: Research perspectives and callenges for Bitcoin and Cryptocurrencies. 2015 IEEE Symposium on Security and Privacy: 104–121.

[7] Brady D (2018). Vote buying scandal stokes fears of EOS governance failure. https://www.coindesk.com/vitalik-called-it-votebuying-scandal-stokes-fears-of-eos-failure. Accessed Oct.6, 2018.

[8] Brown AE, Grant GG. Framing the frameworks: A review of IT governance research. Communications of the Association for Information Systems, 2005, 15(38): 696-712.

[9] Buterin V, Griffith V (2017). Casper the friendly finality gadget. https://github.com/ethereum/research/blob/master/papers/casper-basics/casper_basics.pdf.

[10] Cachin C (2016). Architecture of the hyperledger blockchain fabric. Workshop on Distributed Cryptocurrencies and Consensus Ledgers.

[11] Castro M, Liskov B (1999). Practical Byzantine fault tolerance. The Third Symposium on Operating Systems Design and Implementation. New Orleans, USA, February 1999.

[12] Danezis G, Meiklejohn S (2015). Centrally banked cryptocurrencies. ArXiv Preprint.

[13] David B, Gai P, Kiayias A, Russell A (2018). Ouroboros praos: An adaptively-secure, semi-synchronous proof-of-stake blockchain. Annual International Conference on the Theory and Applications of Cryptographic Techniques.

[14] Decker C, Seidel J, Wattenhofer R (2016). Bitcoin meets strong consistency. Proceedings of the 17th International Conference on Distributed Computing and Networking: 13, ACM.

[15] Dinh TTA, Wang J, Chen G, Liu R, Ooi BC, Tan KL (2017). Blockbench: A framework for analyzing private blockchains. 2017 ACM International Conference on Management of Data:1085–1100.

[16] Dwork C, Naor M (1993). Pricing via processing or combatting junk mail. International Cryptology Conference on Advances in Cryptology.

[17] Fama EF, Jensen MC. Separation of ownership and control. The Journal of Law and Economics, 1983, 26(2): 301-325.

[18] Gencer AE, Basu S, Eyal I, van Renesse R, Sirer EG. Decentralization in Bitcoin and Ethereum networks. 22nd International Conference on Financial Cryptography and Data Security, 2018, 10957: 439-457.

[19] Gervais A, Karame GO, Wüst K, Glykantzis V, Ritzdorf H, Capkun S (2016). On the security and performance of proof of work blockchains. 2016 ACM SIGSAC Conference on Computer and Communications Security: 3–16.

[20] Hotelling H (1990). Stability in competition. The Collected Economics Articles of Harold Hotelling: 50–63, Springer.

[21] Howell BE, Potgieter PH, Sadowski BM (2019). Governance of blockchain and distributed ledger technology projects. Available at SSRN 3365519: 1–24.

[22] Huntington SP (2000). The clash of civilizations? Culture and Politics: 99–118. Springer.

[23] Jeong S (Eugene) (2020). Centralized secentralization: Does voting matter? Simple economics of the DPoS blockchain governance. Available at SSRN 3365519: 1–20.

[24] King S, Nadal S (2012). PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake. Available at https://www.peercoin.net/whitepapers/peercoin-paper.pdf

[25] Lamport L, Shostak R, Pease M. The Byzantine generals problem. ACM Transactions on Programming Languages and Systems, 1982, 4(3): 382-401.

[26] Larimer D (2014). Delegated proof-of-stake (DPOS). Bitshare wWhitepaper.

[27] Li C, Palanisamy B (2020). Comparison of decentralization in DPoS and PoW blockchains. ArXiv Preprint ArXiv:2002.02082.

[28] Lin H-C. Assessment of the partnership quality between travel agencies and health care organizations on the international medical tourism market in Taiwan. Journal of Quality Assurance in Hospitality & Tourism, 2014, 15(4): 356-381.

[29] Marco Iansiti KRL. The truth about blockchain. Harvard Business Review, 2017, 95(1): 118-127.

[30] Mougayar W (2016). The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology. John Wiley & Sons.

[31] Nakamoto S (2008). Bitcoin: A peer-to-peer electronic cash system. Available at https://bitcoin.org/bitcoin.pdf.

[32] Nofer M, Gomber P, Hinz O, Schiereck D. Blockchain. Business & Information Systems Engineering, 2017, 59(3): 183-187.

[33] ONEAL S (2018). Corrupt governance? What we know about recent EOS scandal. Available at https://cointelegraph.com/news/corrupt-governance-what-we-know-about-recent-eos-scandal.

[34] Park S, Kwon A, Fuchsbauer G, et al. SpaceMint: A cryptocurrency based on proofs of space. Financial Cryptography and Data Security, 2018, Berlin: Springer Berlin Heidelberg 480-499.

[35] Pierson P. American hybrid: Donald Trump and the strange merger of populism and plutocracy. The British Journal of Sociology, 2017, 68: S105-S119.

[36] Rosemann M, vom Brocke J. The six core elements of business process management. Handbook on Business Process Management, 2015, 1: 105-122.

[37] Simon HA (1997) Models of Bounded Rationality: Empirically Grounded Economic Reason. vol. 3, MIT Press.

[38] Solomon S (2018). Vote buying scandal rocks the EOS community. Available at https://smartereum.com/36267/vote-buying-scandal-rocks-the-eos-community/.

[39] Staples M, Chen S, Falamaki S, Ponomarev A, Rimba P, Tran AB, Weber I, Xu X, Zhu J (2017). Risks and opportunities for systems using blockchain and smart contracts. Data61 (CSIRO), Sydney. Available at https://research.csiro.au/data61/wp-content/uploads/sites/85/2016/08/Blockchain-RisksandOpps-PDF.pdf.

[40] Swan M (2015). Blockchain: Blueprint for a New Economy, OReilly Media Inc.

[41] Syta E, Jovanovic P, Kogias EK, Gailly N, Gasser L, Khoffi I, Fischer MJ, Ford B (2017). Scalable bias-resistant distributed randomness. 2017 IEEE Symposium on Security and Privacy (SP): 444–460.

[42] Wang WB, Hoang DT, Hu PZ, Xiong ZH, Niyato D, Wang P, Wen YG, Kim DI. A survey on consensus mechanisms and mining strategy management in blockchain networks. IEEE Access, 2019, 7: 22328-22370.

[43] Weber I, Gramoli V, Ponomarev A, Staples M, Holz R, Tran AB, Rimba P (2017). On availability for blockchain-based systems. 2017 IEEE 36th International Symposium on Reliable Distributed Systems (SRDS): 64–73.

[44] Weill P. Dont just lead, govern: How top-performing firms govern IT. MIS Quarterly Executive, 2004, 3(1): 1-17.

[45] Yli-huumo J, Ko D, Choi S, et al. Where is current research on blockchain technology? A systematic review. PLoS ONE, 2016, 11(10): e0163477.