Such shared data can represent ownership or balances in a cryptocurrency (a "distributed ledger," as in Bitcoin or Ethereum), but also in other types of digital assets—such as financial assets, equity, or property rights on digital resources (e.g., file storage, digital content, and information). Any update or change to the shared data is secured through a clever mix of cryptography and economic incentives, and can be extended through the use of smart contracts, which are software contracts that define which transformations should be applied to the data in response to different types of events. Since no intermediary is needed to perform the custody or an exchange of assets recorded on a blockchain, for the first time in history the technology allows for value and digital assets to be reliably transferred between distant parties without any external institution or organization.
On the face of it, when described in this manner, it can be difficult to see how blockchain technology may interact with antitrust, except for potentially reducing the need for antitrust enforcement. After all, blockchain technology seems to reduce costs of the type that can otherwise lead to centralization and entrenched market power in digital platforms. In this article we will argue, however, that if blockchain technology develops in the way that its evangelists expect, it will pose an unparalleled set of novel challenges for antitrust, which will be greater and less easily solved than even the problems posed by the rise of large digital platforms, which have absorbed much scholarly attention over the last decade.
In particular, we emphasize two major points. First, there is considerable reason to think that the decentralized nature of some blockchain implementations may be beneficial for antitrust concerns and reduce the need for antitrust enforcement. We term this the "optimistic view" of the technology. Second, there is reason to believe that blockchain technology may pose practical challenges for antitrust enforcement. We emphasize that antitrust law is set up on the premise that there is a clearly demarcated firm (or set of firms) that may try to seek market power. The decentralized nature of the technology means that identifying an entity to prosecute or hold responsible for any degree of market power (or its abuse) is impossible, and that collusion and price setting between competitors may be harder to detect.
I. An Economic Perspective on Blockchain Technology
Before we embark on the main thrust of our argument, it is useful to expand on how blockchain technology takes advantage of cryptography and incentives to replace trust and third-party verification. From an economics perspective, an implementation of blockchain technology has two key characteristics as a technological solution:
(1) A set of shared data. In the case of the well-developed cryptocurrencies like Bitcoin, the set of shared data are the entries that form, over time, an immutable audit trail of all past transactions and ownership records. This record is referred to as the "digital ledger." As assets like Bitcoin are exchanged between users, the shared data is updated to reflect the corresponding changes in ownership and to allow participants to verify, without relying on an intermediary, such as a bank, that the transaction has successfully taken place.
(2) An incentive system ("consensus rules"). These are designed to ensure that the shared data can only be updated in a way that reflects the truth. Incentives are needed to protect the shared data from being altered by an adversary or bad actor and to ensure that transactions or assets cannot be forged or modified ex post (e.g., creating a record of financial transactions that never occurred). For example, implementations that use "proof-of-work" rely on economic costs to make it prohibitively expensive to rewrite history unilaterally and subvert the consensus about the true state of the shared data once it is formed.
The shared data is probably most easily imagined as the information recorded in a large, append-only log of transactions where each entry is timestamped and cryptographically linked to previous entries. Cryptographically linked refers to the use of cryptography to establish an auditable digital trail between valid transactions over time. Such link forms, as time passes, an immutable chain between subsequent blocks of transactions (hence, a "blockchain" ). Full network participants in a blockchain protocol, who are sometimes referred to as "full nodes," keep a copy of the entire shared data and help broadcast new transactions to the rest of the network as they arrive.
One of the most famous examples of a "proof-of-work" system is the "mining" process used to secure Bitcoin's shared ledger. As new Bitcoin transactions are created and broadcasted to the network, servers running "mining" software compile them into blocks and perform a large number of computations to earn the right to add the next block of transactions to the ledger. These computations are used to find a solution to a particular type of cryptographic puzzle that can only be solved through brute force by trying random numbers. The first server to find a valid solution extends the blockchain and is rewarded for its computational effort by being paid in the form of newly minted bitcoin. Since the results of the computations are useless outside of Bitcoin, but blocks can only be added after having performed them, the effort spent finding the solution constitutes a sunk cost that makes it extremely expensive for an attacker to alter the history of the shared data and revert a valid transaction.
In blockchain implementations based on proof-of-work, the immutability of the records is therefore the result not simply of cryptography, but also of the economic incentives targeted at forming and maintaining an honest "consensus" about what the shared data should represent at any moment in time. Participants in a blockchain protocol have an incentive to collaborate to prevent "greedy attackers" from defrauding the system.
Because participants have an incentive to collaborate to protect the integrity of the cryptocurrency, the most crucial component of blockchain technology to understand for assessing antitrust concerns is the type of incentive system put in place to protect the shared data. As one might expect, a key element is who can participate in the broadcasting of new transactions, maintenance of the shared data and formation of consensus.
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