The Thin Line between Cooperation and Forking in Blockchain
This is a guest post by professor Neil Gandal (Berglass school if economics, Tel Aviv University) and professor Joshua Gans (Rotman School of Management, University of Toronto), advisors to Orbs.
One of the outstanding issues in relation to blockchain technologies is the robustness of consensus mechanisms. The proof-of-work protocol that was developed for Bitcoin has proven robust to various attacks but has shown difficulties in allowing potential upgrades in the operation of the blockchain itself.
Recently, economists have turned their attention to these issues and have developed models to understand how blockchain consensus mechanisms and also potential forks — that is, changes in the blocks themselves or in the underlying protocol work. It is useful to review their findings.
The paper by Biais et.al. examines the “blockchain folk theorem.” In economics, a folk theorem is a theorem many believe to hold even if a perfect proof of that theorem does not exist. In this case, it is the belief that miners will have incentives to work on one blockchain and that this will be the blockchain with the largest number of verified blocks.
The paper demonstrates that miners have an incentive to coordinate on the blockchain they are working on but, at the same time, that same incentive to coordinate can lead them to shift quickly to a fork and work on that if a sufficient number of miners simultaneously chose to do so.
In other words, coordination does not necessarily imply stability. Forks are likely to be driven by information delays and also software upgrades.
Another paper by Barrera and Hurder similarly considers coordination as a driving force in blockchain stability. For a hard fork to arise, a large number of miners need to back the fork even in situations where not all miners follow. The basic model is similar to ‘one CPU, one vote.’ However, they argue that governance rules can smooth the process and lead to compromise solutions that would maximize the surplus of the community.
The bottom line is that economics currently confirms that the type of behavior we see in blockchains is to be expected as the outcome of a coordination game. However, at the same time, blockchains have proven more stable and robust in practice than economic theory would expect in blockchain’s current state. More work remains to be done to understand this, as well as moving beyond proof-of-work schemes, to see if similar robustness can arise in proof-of-stake or other variants of consensus mechanisms.
References
Barrera, Cathy and Hurder, Stephanie, Blockchain Upgrade as a Coordination Game (June 16, 2018). Available at SSRN: https://ssrn.com/abstract=3192208
Biais, Bruno and Bisiere, Christophe and Bouvard, Matthieu and Casamatta, Catherine, The Blockchain Folk Theorem (January 5, 2018). Swiss Finance Institute Research Paper №17–75. Available at SSRN: https://ssrn.com/abstract=3108601
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