Analyzing the Economic Impact of Decentralization on Users

2025-12-12

AI Summary

This paper investigates how miners’ strategic behavior in decentralized ledgers affects end-user transaction fees. We formulate a two-stage game: miners first compete for block space via a Tullock contest, then set prices for users. Our work is the first to embed the Tullock contest into a blockchain fee-market framework, using maximal miner market share as a key structural parameter to rigorously characterize existence and uniqueness conditions of pure-strategy Nash equilibria. We prove that block rewards do not alter the equilibrium price but increase the probability of equilibrium existence. Crucially, we identify decentralization—measured by the dominant miner’s share—as the decisive factor determining both market clearance and user-paid fees. Furthermore, we differentiate pricing responses between patient and impatient users, revealing distinct equilibrium dynamics under heterogeneous time preferences.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Data Mining & Knowledge Management: Representing, Reasoning, and Using Provenance, Trust

Application Category

• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Security and Privacy: Blockchains and distributed ledgers
• Web Mining and Content Analysis: Content-based information diffusion

Abstract

We model the ultimate price paid by users of a decentralized ledger as resulting from a two-stage game where Miners (/Proposers/etc.) first purchase blockspace via a Tullock contest, and then price that space to users. When analyzing our distributed ledger model, we find: - A characterization of all possible pure equilibria (although pure equilibria are not guaranteed to exist). - A natural sufficient condition, implied by Regularity (a la [Mye81]), for existence of a ``market-clearing'' pure equilibrium where Miners choose to sell all space allocated by the Distributed Ledger Protocol, and that this equilibrium is unique. - The market share of the largest miner is the relevant ``measure of decentralization'' to determine whether a market-clearing pure equilibrium exists. - Block rewards do not impact users' prices at equilibrium, when pure equilibria exist. But, higher block rewards can cause pure equilibria to exist. We also discuss aspects of our model and how they relate to blockchains deployed in practice. For example, only ``patient'' users (who are happy for their transactions to enter the blockchain under any miner) would enjoy the conclusions highlighted by our model, whereas ``impatient'' users (who are interested only for their transaction to be included in the very next block) still face monopoly pricing.

Problem

• Modeling user costs in decentralized ledgers via two-stage game
• Determining conditions for market-clearing equilibrium existence
• Analyzing decentralization impact on user pricing and block rewards

Innovation

• Two-stage game models miner competition and pricing
• Market-clearing equilibrium condition ensures full blockspace utilization
• Largest miner's market share determines decentralization impact