Mechanism Design Approaches to Blockchain Consensus

Abstract

Blockchain consensus is a state whereby each node in a network agrees on the current state of the blockchain. Existing protocols achieve consensus via a contest or voting procedure to select one node as a dictator to propose new blocks. However, this procedure can still lead to potential attacks that make consensus harder to achieve or lead to coordination issues if multiple, competing chains (i.e., forks) are created with the potential that an untruthful fork might be selected. We explore the potential for mechanisms to be used to achieve consensus that are triggered when there is a dispute impeding consensus. Using the feature that nodes stake tokens in proof of stake (POS) protocols, we construct revelation mechanisms in which the unique (subgame perfect) equilibrium involves validating nodes propose truthful blocks using only the information that exists amongst all nodes. We construct operationally and computationally simple mechanisms under both Byzantine Fault Tolerance and a Longest Chain Rule, and discuss their robustness to attacks. Our perspective is that the use of simple mechanisms is an unexplored area of blockchain consensus and has the potential to mitigate known trade-offs and enhance scalability.

Keywords: subgame perfect implementation, blockchain, consensus, mechanism design, Byzantine fault tolerance

JEL Classification: D87