Darui
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Permissioned Blockchains, Transaction Fee, and Strategic Validators: An Economic Analysis
Kai-Lung Hui, Rui Shi, Wei T Yue, J Leon Zhao
The use of permissioned blockchain is rising but most permissioned blockchain projects fail quickly. The major reason conjectured for such failure is that the prevalent implementation, i.e., the first-come-first-served (FCFS) mechanism, cannot incentivize participating firms to continuously contribute resources, as it relies on firms’ voluntary resource contributions and charges no transaction fees from users. This prompted some practitioners to suggest using transaction fees to motivate participants. The expectation is firms are encouraged to contribute more service resources and that users enjoy a more efficient service in a sustainable win-win situation. However, the transaction fee mechanism’s impact is highly debatable. To shed light on such debate, we compare the two mechanisms from platform developer’s, firms’, and users’ perspectives. Contrary to expectation, we find implementing transaction fees does not necessarily motivate strategic firms to contribute more resources. Nevertheless, we still find introducing transaction fees can generate higher welfare than FCFS. The welfare gain comes from prioritizing services for high-value users instead of a greater service supply. However, users are likely to be worse off than with FCFS mechanism as high transaction fees enable firms to extract surplus from users. Hence, whether to introduce transaction fees creates a trilemma confronting firms, users, and social welfare. We also provide managerial suggestions based on our analysis.
