Explaining Sustained Blockchain Decentralization with Quasi-Experiments: The Resource Flexibility of Consensus Mechanisms

Decentralization is a fundamental design element of the Web3 economy. Blockchains and distributed consensus mechanisms are touted as fault tolerant, attack resistant, and collusion proof because they are decentralized. Recent analyses, however, find some blockchains are decentralized, others are centralized, and there are trends toward both centralization and decentralization in the blockchain economy. Despite the importance and variability of decentralization across blockchains, we still know little about what enables or constrains blockchain decentralization. We hypothesize that the resource flexibility of consensus mechanisms is a key enabler of the sustained decentralization of blockchain networks. We test this hypothesis using three quasi-experimental shocks (policy-related, infrastructure-related, and technical) to resources used in consensus. We find strong suggestive evidence that the resource flexibility of consensus mechanisms enables sustained blockchain decentralization and discuss the implications for the design, regulation, and implementation of blockchains.

History: Ravi Bapna, Senior Editor; Jui Ramaprasad, Associate Editor.

Funding: This work was funded by the Initiative on the Digital Economy at the Sloan School of Management at the Massachusetts Institute of Technology.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2024.1198.