Blockchain Upgrade as a Coordination Game

Abstract

The choice by a blockchain community of whether to implement a proposed policy upgrade constitutes a coordination game, for which governance rules can help community members to select an equilibrium. Unlike typical scenarios in which governance is studied, in which the entire population is subject to the outcome of the governance process, hard forks are possible and may be desirable for a subset of the blockchain community. We first develop a simple model of strategic chain choice. Coordinating on a single chain is always a Nash equilibrium for the community, whereas a hard fork can be a Nash equilibrium depending on the composition of the community and the upgrade being proposed. Hard forks maximize the social welfare of the blockchain community under select circumstances. We then investigate the performance of two common voting schemes -- majority rule and quadratic voting -- in assisting equilibrium selection and maximizing the social welfare of the community. Neither voting scheme eliminates the occurrence of suboptimal hard forks. We show that, given the constant threat of a hard fork, both the governance rules adopted and restrictions on the policy proposal space are important for maximizing community value.

Keywords: Social Choice, Blockchain, Social Welfare, Coalitions, Majority Rule, Policy Formulation, Policy Implementation

JEL Classification: D71, D74, D78