Blockchain competition: The tradeoff between platform stability and efficiency

Since 2017, the Bitcoin blockchain system has experienced 105 fork divergences. The rapidly increasing blockchain forks have resulted in fierce competition and created significant controversies in blockchain community. To analyze this competitive aspect, we consider blockchain as a two-sided platform that serves both customers and miners. We develop a game-theoretic model to investigate how a blockchain platform's decision on its settings, such as block size and transaction fee, affects the competition between blockchain platforms as well as the participation behavior of customers and miners. Our findings suggest that increasing the transaction fee alleviates congestion on the platform when customers have a relatively balanced need between efficiency and safety. In contrast, it induces congestion when efficiency is valued over safety. In addition, under hard fork competition, the difference in blockchain platforms' block sizes directs the attention of miners towards different types of mining rewards. Moreover, it also affects the optimal types of customers the blockchain platforms should target. Furthermore, we find that the degree of congestion and the risk attitudes of participants play vital roles in differentiating different block-sized platforms' optimal transaction fees. We provide empirical evidence on the theoretical findings and practical implications for blockchain platform competition with respect to the behaviors of platform participants. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

Since 2017, the Bitcoin blockchain system has experienced 105 fork divergences, leading to fierce competition and controversies in the blockchain community. The decision on settings, such as block size and transaction fee, affects competition between platforms and participant behaviors. Transaction fee adjustments can alleviate congestion when customer needs are balanced between efficiency and safety, but induce congestion when efficiency is prioritized. Differences in block sizes direct miner attention towards different mining rewards and influence the optimal target customers for blockchain platforms.