“Understanding Blockchain Governance Decentralization: An Analysis and Agent-based Simulation of Algorithmic Governance in the Proof-of-Stake Consensus Mechanism” by Dr. Jungpil Hahn
Dr. Jungpil Hahn
Head, Department Of Information Systems and Analytics
National University of Singapore
Algorithms are increasingly instrumental in making or mediating decisions, a phenomenon referred to as algorithmic governance. In this paper, we study a novel emerging form of algorithmic governance by focusing on blockchains. Blockchains are distributed databases of transactions, best known as the underlying technology of cryptocurrencies and several other major Fintech innovations. They function without a defined central operator, and rely upon consensus mechanisms to incentivize agreement about the blockchain’s content. Decentralization of decision-making power in consensus mechanisms is critical, giving rise to tamper-resistant data storage, the main value proposition of blockchains. However, recent attacks illustrate that decentralization cannot be taken for granted. The rise of blockchains raises important questions of how governance changes when it is mediated by algorithms and what outcomes such governance generates. We use an agent-based simulation of proof-of-stake, a salient consensus mechanism, to analyze how the interplay of agent behavior and technological artifacts jointly produces an emergent outcome, that is, the distribution of decision-making power. We extend the notion of algorithmic governance by theorizing that algorithmic governance entails not only algorithm-mediated decision-making, but also the algorithm-mediated assignment of decision rights. We demonstrate that this kind of algorithmic governance may be associated with two major limitations: unintended consequences and opacity. We also show how manipulations of key blockchain parameters affect the degree of decentralization. Our findings can be applied in understanding the mechanisms that lead to decentralization in blockchain governance as well as in designing blockchains that are prone to decentralization and therefore more secure.