Appropriation Hazards and Platform Governance: How Distributed Decision Rights Erode Participation

Abstract

This paper examines the effect of distributing formal decision rights on platform participation. Recent advances in blockchain technology enable digital platforms to allocate formal decision rights that are binding and irreversible. Such a governance innovation has generated excitement as some believe it has the potential to enhance platform participation by meaningfully distributing control, thereby mitigating appropriation hazards from platform owners. This paper presents a more nuanced perspective. It suggests that distributed governance introduces appropriation hazards from other exchange partners who lack a vested interest in the platform and represents a salient source of opportunism. Consequently, distributed decision rights could expose exchange partners to more severe appropriation hazards, leading to reduced platform participation and particularly among those more vulnerable to these hazards. I analyze the staggered adoption of a distributed governance structure among a large sample of cryptocurrency exchange platforms (DEXs). I find that the adoption of a distributed governance structure is associated with a significant decrease in the number of participating depositors and total deposits. This negative effect, primarily driven by depositors who have intermediate levels of deposits, in turn drives higher levels of deposit concentration. This research therefore highlights the challenges associated with implementing decentralized governance mechanisms in platform ecosystems.

Keywords: platform governance, decision rights, appropriation hazards, blockchain, smart contracts, digital platforms, DeFi, decentralized finance, cryptocurrency, digital economy

JEL Classification: D71, D7