Understanding Decentralization of Decision-Making Power in Proof-of-Stake Blockchains: An Agent-Based Simulation Approach

Abstract

Blockchain systems allow for securely keeping shared records of transactions in a decentralized way. This is enabled by algorithms called consensus mechanisms. Proof-of-work is the most prominent consensus mechanism, but environmentally unsustainable. Here, we focus on proof-of-stake, its best-known alternative. Importantly, decentralized decision-making power is not an inherent feature of blockchain systems, but a technological possibility. Numerous security incidents illustrate that decentralized control cannot be taken for granted. We therefore study how key parameters affect the degree of decentralization in proof-of-stake blockchain systems. Based on a real-world implementation of a proof-of-stake blockchain system, we conduct agent-based simulations to study how a range of parameters impact decentralization. The results suggest that high numbers of initial potential validator nodes, large transactions, a high number of transactions, and a very high or very low positive validator network growth rate increase decentralization. We find weak support for an impact of changes in transaction fees and initial stake distributions. Our study highlights how blockchain challenges our understanding of decentralization in information systems research, and contributes to understanding the governance mechanisms that lead to decentralization in proof-of-stake blockchain systems as well as to designing proof-of-stake blockchain systems that are prone to decentralization and therefore more secure.

Keywords: Blockchain, consensus mechanism, centralization, decentralization, decision-making power, governance

JEL Classification: M1