COMPETITION LAW OBSERVER

A blog by Centre for Competition law & Policy, NLU Jodhpur

THE TRUST-CHAIN AND ITS ANTI-TRUST IMPLICATIONS

Ekjot Kaur Dang

INTRODUCTION

The fascination with blockchain technology today is akin to people being intrigued by the internet in the 1990’s. In simple terms, blockchain is a record that works as an open and distributed ledger, where transactions between the users can be recorded either manually or automatically.[i] Simply put, a blockchain is like an online excel spreadsheet where multiple participants can come and enter data and the entire database is visible to all the participants. However, no one can delete the entries once they’ve been added to the spreadsheet.

Blockchains have a set of outstanding features. First, blockchains work in a decentralized format.[ii] This implies that if a new block is to be added to the ledger, it will be done through a consensus mechanism.[iii] The nodes on a network participate in a voting to decide whether the block will be added or not.[iv] There is no central authority in a blockchain that makes such decisions, rather this is a decentralized activity, which makes the blockchain more secure for its participants as there will a lower chance of abuse of authority for personal gains. Second, blockchains are immutable databases, where once a record is made it cannot be altered or deleted.[v] The only way of rectifying a transaction is by making a new transaction.[vi] This gives blockchain technology an added advantage of transparency and accountability. Third, each blockchain and its users follow a set of rules and procedures called the ‘protocol’ which cannot be changed without a majority agreeing to such change.[vii] Last, a blockchain is pseudonymous as all the users are identified by alphanumeric addresses.[viii] Here, the users facilitate the transactions on a peer-to-peer basis rather than making it through a central authority.

This paper will attempt to answer a few questions with respect to the foundation laid above. The primary question to be answered would be, can blockchains (both permissioned and permission-less) attain market power and eventually, abuse their dominance while competing with other blockchains and similar non-blockchain entities in a relevant market? A secondary question that would also be analyzed is, whether the antitrust framework is competent to accommodate the challenges posed by blockchain technology? If yes, what kind of regulatory steps shall be taken by antitrust authorities to ensure that a blockchain does not abuse its dominant position in the market?

 

BLOCKCHAIN: HOW IT FUNCTIONS AND OTHER BASIC CONCEPTS

Types of Blockchains

Usually, there are two types of parties on a blockchain. The first party includes the ‘users’ of the blockchain who are parties to a transaction. The second party is the ‘validator’ or ‘third parties’ who are accountable for verifying the transactions on a blockchain. The primary and the most unique factor of the blockchain is the “trust” element associated with it. It offers trust without the requirement of a third party in a transaction.[ix] Although, this statement is not entirely true. In some cases, third parties do play a role in completing the transactions, however, such parties are decentralized and get rewarded to follow the protocols of a blockchain fairly.[x] The amount of trust that can be placed in such third parties varies and can be categorized into two types of blockchains:

  1. Permissioned Blockchain (Private Blockchain): A permissioned blockchain is private in nature.[xi] These blockchains are closed i.e. the appointment of validators and viewing the database can only be done by those who are authorized by the central authority.[xii] Some famous examples of a permissioned blockchain are- the Libra blockchain which was introduced by Facebook as a crypto-currency backed by a basket of physical currency, TradeLens blockchain by IBM and Maersk for shipping solutions etc.  
  2. A permissioned blockchain can be divided into two further categories. First, a “single entity blockchain” which means that only a single entity has the authority to set the protocol and other users on the blockchain has the permission to read through the transaction.[xiii] Second, a  “consortium blockchain” which means that the protocol in this blockchain is set by a consensus mechanism but by a pre-selected bunch of nodes.[xiv]
  • Permission-less Blockchain (Public Blockchain): Contrary to the permissioned blockchain, the permission-less blockchain is accessible to everyone. This entails that anyone who has the required equipment can become a validator and therefore, there can be numerous validators.[xv] The identity of the users is pseudonymized to ensure that the users identity is not disclosed to the validators.[xvi] In a permission-less blockchain, anyone can view the ledger under the alphanumeric pseudonyms of the users.[xvii] Some of the permission-less blockchains allow only a small number of actions to be performed in a transaction but that is not always the case.[xviii] Most of the permission-less blockchains only require ‘proof of work’ or ‘proof of stake’ to make new entries.[xix] Common examples of such blockchains include cryptocurrencies such as Bitcoin, Ethereum, LiteCoin etc.
  • Semi-Private Blockchain: In this case, the blockchain is partly public and private. In some cases, this can mean that there exists permissioned blockchains where only a certain group of individuals are allowed to make transactions.[xx] It can also be in less strict formats where making new blocks of transactions is limited to some extent. However, no such model of blockchains have been developed yet.[xxi]

The primary contention amongst the permissioned and permission-less blockchain is with respect to the cost of transaction.[xxii] The validators in case of a permission-less blockchain are rewarded in terms of tokens and eventually by some transaction cost to verify the transactions. Whereas, in the case of permissioned blockchain, the validators are appointed by a controlling firm or a consortium of firms which brings back the need for a trusted ‘third-party’ in the process of completing a transaction.[xxiii] This in turn can raise the cost of transaction, contrary to the initial aim of the blockchain technology as these validators are appointed by the consortium or the sole appointing authority and thus, they have the power to regulate the cost of transaction.

Blockchain 1.0, 2.0 and 3.0

As of today, there are three generations of blockchains based on which the blockchain applications are built. Blockchain 1.0 is the most renowned model which is used for currency, cash, digital payment systems and currency transfer etc.[xxiv] Blockchain 2.0 is based on the ‘smart contracts’ model. This further includes “stocks, bonds, futures, loans, mortgages, titles, smart property” within its ambit.[xxv] Lastly, Blockchain 3.0 is focused on sectors such as governance, science, health, art and culture etc.[xxvi]

The Consensus Mechanism

The consensus mechanism on a blockchain dictates its governance which can be an important factor to see whether a blockchain is being anti-competitive or not. In public or permission-less blockchains, a ‘proof of work’ format of consensus is used.[xxvii] Here, users (also known as ‘miners’) solve a cryptographic problem in order to verify their transaction.[xxviii] This is similar to a race where the user who solves this puzzle faster gets rewarded by gaining transaction fee. Similarly, a ‘proof of stake’ format of consensus is also under development by Ethereum wherein consensus will be gained by using crypto economics and game theory.[xxix]

In cases of private or permissioned blockchains, such mechanisms of ‘proof of work’ or ‘proof of stake’ do not exist. Here the value of the blockchain is derived from applicability and valuation.[xxx]

The governance in blockchains is derived from the consensus mechanisms of the blockchain. In a ‘proof of work’ sort of consensus mechanism, the consensus is not centralized, which means that there are lesser chances for the blockchain to take unilateral actions. However, there is a high likelihood of abusing the consensus mechanism for unilateral gains in private blockchains. New forms of consensus mechanisms are also coming up in order to make the governance more organized. Take for instance Dash, which is a crypto-currency, gives its users votes if they hold on to the tokens.[xxxi]

THE ANTITRUST IMPLICATIONS OF THE BLOCKCHAIN TECHNOLOGY

Competition between Blockchain and Non-Blockchain Platforms

As of today, we have heard of the term network effects in digital markets and platforms. In a nutshell, network effect means that the more a platform is used, the more users it attracts.[xxxii] In terms of blockchain, the network effects don’t affect the competition. Rather it is the ‘token effect’ that  helps to get more users on a blockchain and increase its profitability.[xxxiii] Blockchains in a way give more financial utility when the utility of the application is low.[xxxiv] Here, the coins offered at the initial stages gives an added financial incentive to the users to make the blockchain popular.[xxxv] These offerings can be in the form of coins, tokens. This phenomenon of giving financial offerings is not observed on non-blockchain platforms. The token effects have more impact as compared to the network effects on digital platforms. It can be observed in the cases of crypto-currencies such as Bitcoin and Dogecoin that the token effects can create high volatility in the valuation of such currencies. Therefore, in the long run, it is possible to witness blockchain and non-blockchain platforms compete against each other.

Furthermore, blockchain also holds the potential to challenge digital and traditional markets as there is no requirement for to get a trusted third party involved in the carrying out of the transaction.[xxxvi]  The actions on a blockchain are collectively verified by multiple validators who are in return compensated with transaction fees.[xxxvii] Here the transaction is carried between two participants This would eventually mean that “blockchains will drop search costs, causing a kind of decomposition that allows you to have markets of entities that are horizontally segregated and vertically segregated.”[xxxviii] Thus blockchain can start a ‘self-sovereign identity’ model to compete with the non-blockchain platforms as well.[xxxix]

Determination of a Dominant Entity

Blockchains are decentralized organizations till date and they have not been recognized as legal entities.[xl] This means that if in case any ant-competitive conduct is found to be carried on a blockchain, who will be liable for such conduct? Furthermore, the determination of a dominant position is also very sensitive in such cases. For instance, in recent cases involving digital and platform markets the Competition Commission of India observed various aspects to determine dominance. These include factors such as market share, strength of network effects, third party research reports, involvement of unilateral or coercive conduct etc.[xli] One of the ways to determine the dominant position in blockchains could be based on the total users on an application. Other ways to check the dominant position can be based on the total number of recorded transactions (blocks) on a blockchain, the market powers of the blockchain in the relevant market, the consensus mechanisms adopted by the blockchain, the type of applications on which the blockchain is based i.e whether it is a Blockchain 1.0, 2.0 or 3.0.

However, the above-mentioned criterion might not present a holistic view in terms of the dominant position of a blockchain as well. We cannot compare the blockchains to be dominant based on the consensus mechanism if some of them are public and some are private due to the very basic difference of the governance mechanism adopted by such blockchains. Furthermore, the lack of a central authority makes the determination of a dominant entity even more difficult. Therefore, one of the antitrust implications at this stage of blockchain technology is the difficulty in establishing a dominant player in the market.

Likelihood of Abuse of Dominance on Blockchains

In public blockchain, the transactions and information recorded are visible to everyone. In the case of a private blockchain, this visibility is only limited to certain designated users only. This concept is known as the “visibility effect”.[xlii] The visibility effect is wider in cases of public blockchains, thus, meaning higher transparency. This ensures that the scope of anti-competitive activities is low in public blockchains. However, at the same time, the transactions might be visible to everyone but the purpose and the users creating the transaction is not disclosed. This is because the users’ identity is kept pseudonymous. This is known as the “opacity effect”.[xliii] The opacity effect is even more prevalent in cases of a private blockchain because of the limited number of users on it.

Next, it can also be noticed based on the above explanation that a private blockchain restricts access of users. In competition law terms, this means that there is an inherent refusal to grant access (or refusal to deal) practice embedded in every private blockchain. This is not a characteristic of a public blockchain as it would then mean that the blockchain is not public in nature. “A private blockchain network requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter . . . The access control mechanism could vary: existing participants could decide future entrants; a regulatory authority could issue licenses for participation; or a consortium could make the decisions instead[xliv] In this context, reliance can be placed on the “no economic sense” test.[xlv] Under this test, conduct is deemed anti-competitive if it reduces or eliminates competition and gives the dominant entity an upper hand only because there was such a decline in the competition.[xlvi] The basic underlying value is to find an economic justification for the conduct of the dominant player in the market.[xlvii]

Another example of potentially anti-competitive conduct could be by tying and bundling. For instance, Omnity is a blockchain application that asks for the users Ethereum Wallet Address to get tokens.[xlviii]

Next, private blockchains can also use its flexibility in changing the protocol for predatory pricing. A change in the protocol can ensure quick changing of prices in such blockchains which would imply that changes can be made on a real-time basis based on the competitors pricing of tokens, levying of transaction fee etc. Exploitative abuse of its position is another possibility in private blockchains where prima facie preferential treatment can be provided to a certain class of users.

Lastly, discriminatory conduct can also take place within private blockchains as “users may encounter discriminatory terms because the application of different terms to different users is an effective way to urge users to join and use the blockchain. Discriminatory pricing can incentivize some users to stay active on the blockchain by offering lower prices, thus creating a potential discrimination claim for others.”[xlix]

THE REGULATORY INTERVENTION FOR BLOCKCHAIN TECHNOLOGY

Blockchain poses new challenges to the antitrust regulators with regards to enforcement. In general parlance, enforcement is done against entities who engage in anti-competitive conduct and it is known to the regulator as to who controls such entity. In the case of decentralized organizations such as blockchains, the central authority that can be held liable for anti-competitive conduct cannot be deduced that easily. Furthermore, the users of a blockchain have a pseudonymous identity which gives them an added layer of protection to be held liable for such activities. Algorithms give the companies an added incentive to venture into anti-competitive behavior and at the same time, it makes it difficult for the regulators to gather evidence against such practices.[l]

In this regard, there are two types of blockchains under development, the ones that are compliant with the law and are being developed with government authorities and the others are highly encrypted blockchains. The compliant blockchains are said to have certain disadvantages as the pseudonymous identity is not that strong in these cases and the authorities can look behind this to reveal the actual identity of the users.[li] In the highly encrypted blockchains, the encryption is getting so strong that it can potentially cause high barriers for enforcement authorities to get access to the identity of the users.[lii]

Furthermore, blockchains work on lex cyptographica, which means that as long as users interact with a blockchain and pay the validators a transaction fee, the blockchain will keep on functioning and nothing can be done to pause or eliminate its functioning.[liii] There are various examples for this such as Augur, which is a decentralized market prediction making platform, which has no central authority which can control its function.[liv] Therefore, if in the future some antitrust authority figures out a case to prove that a blockchain is anti-competitive, it has no way to stop the functioning of such blockchain or enforce a remedy against it.

Thibault Schrepel proposes a unique voting mechanism to strike a balance between antitrust enforcement and blockchain users. He suggests that, “The only viable option seems to embed regulatory measures into the blockchain’s governance. Just as the mechanism by which users would vote to reveal the identity of an individual involved in anticompetitive practices on a private blockchain, a mechanism could be developed in which blockchain users vote on the creation of forks, determined by courts or antitrust agencies, in order to delete or stop transactions. Blockchain communities agreeing to introduce such mechanisms would be treated by regulators and courts as being more in line with the law than blockchains refusing to do so.”[lv]

In my opinion this approach can only be complied with in economies where the compliance with laws is not seen as a mandate but rather as a responsibility. However, blockchain technology is not restricted within certain boundaries and therefore, this compliance poses an interesting challenge for the regulators across countries. Furthermore, in an economy like India, which is already threatened by the existence of cryptocurrency, it would be very unfathomable for the competition regulators to resort to such an approach.

CONCLUSION

The blockchain technology is a game-changer not only technologically but also in the way most markets work today. It has huge potential to overtake big tech and other common digital platforms because of the added incentives given by it. One of the most important characteristics for this would be the decentralized structure and the pseudonymous identity provided under the blockchain. However, the antitrust concerns posed by blockchains, especially private blockchains, can cause serious anti-competitive harm in the market and the enforcement against it is even more difficult to imagine as of now. The best that antitrust regulators can do to deal with these issues is to get informed about the blockchain technology at the latest and not commit the same type I and type II errors as was done in the case of digital markets. The regulators need to understand that innovation and anti-competitive behavior go hand in hand and they cannot subdue one to get rid of another. In this sense, the faster the regulators appreciate the beauty behind this technology the better enforcement solutions they can come up with, without hampering the innovation and advancement element of this technology.

The author is a final year student at Jindal Global Law School, India.


[i] Melanie Swan, Blockchain: Blueprint for A New Economy vii (O’Reilly Media 2015)

[ii] Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology a nd The Rise of Lex Cryptographia (2015), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664

[iii] Id.

[iv] Id.

[v] Don Tapscott & Alex Tapscott, A Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World

[vi] Paul Vigna & Michael J. Casey, The Truth Machine: The Blockchain and The Future of Everything

[vii] Schrepel, Thibault, Is Blockchain the Death of Antitrust Law? The Blockchain Antitrust Paradox (June 11, 2018). Georgetown Law Technology Review / 3 Geo. L. Tech. Rev. 281 (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3193576 

[viii] Phil Champagne, The Book of Satoshi: The Collected Writings of Bitcoin Creator Satoshi Nakamoto (2014)

[ix] Pike, C, and A. Capobianco (2020), Antitrust and the trust machine, http://www.oecd.org/daf/competition/antitrust-and-the-trust-machine-2020.pdf

[x] Id.

[xi]Permissioned and Permission less Blockchains: A Comprehensive Guide. Blockchain-Council.Org, 2019, https://www.blockchain-council.org/blockchain/permissioned-and-permissionless-blockchains-a-comprehensive-guide/  

[xii] Id.

[xiii] Supra Note vii

[xiv] Supra Note vii

[xv] Supra Note ix

[xvi] Id.

[xvii] Id.

[xviii] Supra Note vi

[xix] Ameer Rosic, Proof of Work vs Proof of Stake: Basic Mining Guide, Blockgeeks (2017),
https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/

[xx] Supra Note vii

[xxi] Mastering Blockchain – Second Edition (2021). Available at: https://www.oreilly.com/library/view/mastering-blockchain/9781788839044/1acd4b71-0ebb-4178-9d10-27401177fb0f.xhtml

[xxii] Id.

[xxiii] Id.

[xxiv] Supra Note v

[xxv] Supra Note i

[xxvi] Supra Note i

[xxvii]  Supra Note vi

[xxviii] Supra Note vi

[xxix] Vlad Zamfir, Introducing Casper “The Friendly Ghost”, Ethereum Blog (Aug. 1, 2015), https://blog.ethereum.org/2015/08/01/introducing-casper-friendly-ghost

[xxx] Supra Note vii

[xxxi] Dash, https://www.dash.org

[xxxii] Cf. John M. Newman, Complex Antitrust Harm in Platform Markets, CPI Antitrust Chron. 3 (May 2017)

[xxxiii] Supra Note vii

[xxxiv] Chris Dixon, Crypto Tokens: A Breakthrough in Open Network Design, MEDIUM (June 1, 2017), https://medium.com/@cdixon/crypto-tokens-a-breakthrough-in-open-networkdesign-e600975be2ef

[xxxv] Christian Catalini & Catherine Tucker, Seeding the Scurve? The Role of Early Adopters in Diffusion 1 (2016)

[xxxvi] Supra Note ix

[xxxvii] Supra Note ix

[xxxviii] Supra Note at v (citing an interview with Vitalik Buterin in 2015)

[xxxix] Alex Preukschat, Self-Sovereign Identity—A Guide to Privacy for Your Digital Identity with Blockchain, MEDIUM (Jan. 11, 2018), https://medium.com/@AlexPreukschat/selfsovereign-identity-a-guide-to-privacy-for-your-digital-identity-5b9e95677778

[xl] John M. Newman, Procompetitive Justifications in Antitrust Law, 94 IND. L.J

[xli] Harshita Chawla v WhatsApp Inc., Case No. 15 of 2020 and Federation of Hotel and Restaurant Associations of India v MakeMyTrip India Pvt. Ltd., Case No. 14 of 2019

[xlii] Supra Note vii

[xliii] Supra Note vii

[xliv] Praveen Jayachandran, The Difference Between Public and Private Blockchain, IBM (May 31, 2017), https://www.ibm.com/blogs/blockchain/2017/05/the-difference-betweenpublic-and-private-blockchain/

[xlv] Thibault Schrepel, The “Enhanced No Economic Sense Test”: Experimenting With Predatory Innovation, 7 N.Y.U. J. INTELL. PROP. & ENT. L.  (2018)

[xlvi] Id.

[xlvii] Max Raskin, The Law and Legality of Smart Contracts, 1 GEO. L. TECH. REV. (2017)

[xlviii] Omnity Round 2 (OM), AIRDROP ALERT.COM, https://airdropalert.com/omnity-round-2-airdrop

[xlix] Supra Note vii

[l] Richard Posner, Antitrust in the New Economy, 68 Antitrust L.J. 925, (2001).

[li] John Bohannon, Why Criminals Can’t Hide Behind Bitcoin, SCI. MAG. (Mar. 9, 2016), http://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin

[lii] Michael del Castillo, With Zcash Launch, Blockchain Enters the Age of Anonymity, COINDESK (Oct. 28, 2016), https://www.coindesk.com/zcash-launch-anonymousblockchain/

[liii] Supra Note ii

[liv] Robert P. Murphy & Silas Barta, Understanding Bitcoin: The Liberty Lover’s Guide to The Mechanics and Economics of Crypto-Currencies (2017)

[lv] Supra Note vii


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