A Mechanism Design Approach to Blockchain Protocols

Blockchain-based systems such as cryptocurren-cies are achieving widespread usage, with a market capitalization of $150B (USD)as of September 2017. However, the most prominent platforms that account for over 70% of this market - Bitcoin & Ethereum - are exhibiting increasingly lower levels of decentralization. This poses the problem of concentrating levers of consensus to a select group of agents in the system. At the same time, attempts at higher levels of decentralization poses the problem of limiting scalability of such systems. In this paper, using mechanism design we propose a way of designing payoffs in order to disincentivize certain exhibited behaviors and incentivize desired behaviors of miners in such systems. Our approach indicates potential for research in this area for solving the much larger problem of centralization in decentralized systems such as blockchain.