An Economic Model of Consensus on Distributed Ledgers

52 Pages Posted: 24 Nov 2021

See all articles by Hanna Halaburda

Hanna Halaburda

New York University (NYU) - Leonard N. Stern School of Business

Zhiguo He

University of Chicago - Finance

Jiasun Li

George Mason University - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: November 18, 2021

Abstract

In recent years, the designs of many new blockchain applications have been inspired by the Byzantine fault tolerance (BFT) problem. While traditional BFT protocols assume that most system nodes are honest (in that they follow the protocol), we recognize that blockchains are deployed in environments where nodes are subject to strategic incentives. This paper develops an economic framework for analyzing such cases. Specifically, we assume that 1) non-Byzantine nodes are rational, so we explicitly study their incentives when participating in a BFT consensus process; 2) non-Byzantine nodes are ambiguity averse, and specifically, Knightian uncertain about Byzantine actions; and 3) decisions/inferences are all based on local information. The consensus game then resembles one with preplay “cheap talk” communications. We characterize all equilibria, some of which feature rational leaders withholding messages from some nodes in order to achieve consensus. These findings enrich those from traditional BFT algorithms, where an honest leader always sends messages to all nodes. We also study how the progress of communication technology (i.e., potential message losses) affects the equilibrium consensus outcome.

Keywords: Ambiguity aversion, Blockchain, Byzantine fault tolerance, Distributed consensus

JEL Classification: C72, D02, D82, D85, G14, G29

Suggested Citation

Halaburda, Hanna and He, Zhiguo and Li, Jiasun, An Economic Model of Consensus on Distributed Ledgers (November 18, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-137, Available at SSRN: https://ssrn.com/abstract=3966551 or http://dx.doi.org/10.2139/ssrn.3966551

Hanna Halaburda

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Jiasun Li

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://sites.google.com/view/jiasunli

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