Essays on Blockchain Platforms: Decentralization, Delegation and Governance

This dissertation addresses economic and operational issues arising in blockchain application by examining three decentralization mechanisms: Proof-of-work (PoW), voting scheme, and delegation. Chapter 1 investigates the proof-of-work mechanism in the Bitcoin system. Chapter 2 and 3 explore the vote-based mechanism and delegation features in Steemit, a blockchain-based social media platform. The common goal in these blockchain applications is decentralization, i.e., operating without centralized control. The most popular blockchain application is Bitcoin. One of the key features of the Bitcoin application is decentralization: It is designed to operate without any centralized control. This feature is critical to the operation of the system because the system allows agents or miners to participate in verifying transactions and record-keeping. It uses a proof-of-work (PoW) protocol to validate transactions without the need for a trusted intermediary. The system’s decentralization is related to the participation of miners. A large number of miners involved in the process would enhance the security and trust of the system. In Chapter 2, we raise the question of whether the Bitcoin system can sustain decentralization, considering the importance of decentralization. We examine the question by drawing insights from a game-theoretical model that reflects the participation of miners in the record-keeping process. Furthermore, we empirically support our insights from the model using data from the Bitcoin system. We conclude that the decentralization of the Bitcoin system is not sustainable. Besides the PoW protocol, many blockchain platforms use other mechanisms to self- govern. Notably, the voting system is used as one of the decision-making mechanisms for self- governance in many blockchain applications. In Chapter 3, we primarily look into the governance aspect of a blockchain platform that users a voting system. We examine a blockchain-based social media platform, Steemit, which rewards its users for creating and curating blogs. The platform uses a voting system that aggregates votes from its users and distributes rewards to its contributors based on the votes. The platform also allows users to trade (buy or sell) votes from others to promote their creations. We investigate whether trading votes benefit users financially and increase their engagement in the platform. We find that vote trading positively affects users’ rewards and engagement in the short run. In the long run, users’ productivity reduces, and the platform sees fewer contributions. Moreover, we provide short-run and long-run implications of trading votes using Steemit’s blockchain transactions data. Chapter 4 mainly focuses on the delegation feature in Steemit. The current trend among blockchain applications shows that delegation has become a prominent feature, specifically for decentralized autonomous organizations (DAOs). It is related to transferring decision-making power like voting rights to others. In the traditional investment world, delegating investment decisions to financial experts is quite common. Individual investors rationally delegate the responsibility to financial managers for their expertise and seek better returns from their investment. However, delegating investments (stakes) to other users in peer-to-peer platforms may not have similar implications as delegating investment decisions to professionals, specifically when the platforms are decentralized. We investigate how the delegation feature helps users and the platforms. We find that delegation brings higher rewards to users. However, delegating stakes or voting rights reduces users’ engagement. Our findings have many implications for platform designers, researchers, and policymakers. We believe that the lack of thoughtful design of the decentralized mechanisms could negatively impact the quality of decision-making in a decentralized organization. Ultimately, these mechanisms can affect the long-term sustainability of the platform.