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Centralising decentralisation: Misleading incentives in blockchain-based systems

6 February 2019
4 pm
Classroom 1

Blockchains are distributed systems that allow to store trustworthy information without the pre-requisite of trust between the system participants. However, for this property to be preserved, ‘who’ writes these data into the ledger must be acceptable to all members. Thus, centralisation in one of its multiple facets is fundamentally against the core principle of blockchain-based systems.   Cryptocurrencies  are the most widely adopted incarnation of this technology. Cryptocurrencies are plagued with economic incentives, some of them are obvious, some other appeared inadvertently. In this presentation we will review different incentives that have been placed in cryptocurrencies, and we will show that all of them lead to centralisation of these economies. 

The presentation first introduces basic, common concepts. We will first discuss the effect of the so-called proof-of-work on the concentration of power inside of different cryptocurrencies and discuss whether alternative schemes would have succeeded in alleviating this imbalance. Then, we will review the effect of a stringent, predictable monetary supply showing the path towards centralisation, as compared to a simplistic null model prediction. As a consequence, the inequality is far larger than in any real-world economy. Finally, we will introduce the results of the analysis for the Lightning network, a fast network of payments introduced to scale up the number of transactions in some blockchain systems, another - new - source of centralisation in blockchain-based systems

The results are based on a large-scale analysis of five different cryptocurrencies: Bitcoin, Litecoin, Ethereum, Dogecoin and Feathercoin. Our dataset involves above 50 million users and 1 billion transactions. We show the emergence of common patterns in them all of these cryptocurrencies: an increased centralisation of the economic flow and appearance of systemic players that dominate large parts of the supply in the system.

Claudio Tessone - EZH