Building a Conceptual Framework for Decentralised Digital Ecosystems
Daily Internet use means dealing with a very few, very big, businesses. There is a general feeling that these businesses might be too big. One populist approach is to call for such businesses to be broken up. Another, less interventionist solution uses the concept of decentralisation. Technology-powered decentralisation has the potential to have sweeping effects on the economy and on personal lives. The authors, Rob Nicholls and Simonetta Vezzoso have developed a conceptual framework to analyse decentralised digital ecosystems. They have a particular emphasis on the competition law issues that arise.
Our paper, "Decentralised Digital Ecosystems and Competition Law: A Conceptual Framework," analyses digital ledger technology as a tool to implement decentralisation. It provides an overview of the current blockchain landscape. It also offers a framework of analysis by first clarifying the concept of decentralisation. It analyses decentralised ecosystems by adopting a systems perspective. In doing so, it draws the important distinction between blockchain and distributed ledger technology as centralised systems and those which actually offer decentralisation. The paper uses the broad conceptual framework that it develops to discuss a selected number of potential competition policy aspects related to blockchain ecosystems.
The analytical approach is to argue that a decentralised digital system can be usefully deconstructed into three interconnected layers, namely protocol, network, and data. Each of these different layers could have different degrees of decentralisation.
The protocol layer includes the technological backbone that constitutes the ‘back-end’ of the system, upon which the other layers, namely networks and data, are built. The protocol is merely a piece of software, and therefore inert by itself. The codebase of a specific network can be based on an existing framework (e.g., Bitcoin, Ethereum, etc.) or written from scratch. At the protocol layer, a relevant competition law question would be whether miners and founders could push through changes of the protocol that are anticompetitive. This might be in the form of collusion between mining pools or as a result (in public blockchains) of ‘forking wars’.
The network layer is the level at which the protocol is implemented. It consists of the actual network of independent servers that bring a blockchain system to life by connecting participants to enable the sharing and verification of data. From the competition policy perspective, the owners of the nodes could therefore be considered undertakings (in EU law) or ‘acting in trade or commerce’ to the extent that they exercise an economic activity. This layer provides the potential for enforcement regtech by permitting competition authorities to manage nodes within specific blockchains for competition enforcement purposes.
The data layer is the shared data record structure. It refers to the information processed and stored by the system in the form of records. This is indeed the core functionality the system delivers: a shared data structure with some attributes such as persistence, transparency, and censorship resistance. This layer has attracted the most attention in competition policy circles so far. One of the major concerns is that increased transparency, possibly combined with the use of smart contracts may facilitate and/or strengthen anti-competitive collusion.
Besides these three core system layers, there can be a complex construct of off-chain processes. This introduces an application layer of the applications that run on top of the decentralised system platform. This forms the primary user interface for blockchain networks. At this layer, network participants could use smart contracts to facilitate and/or strengthen anti-competitive collusion. Smart contracts could be employed by colluding parties to punish defection. This layer also creates the threat of hub-and-spoke conspiracies.
The paper concludes that decentralisation does not, of itself, remove concerns about anticompetitive conduct. Indeed, the anticompetitive behaviour could potentially be nested even in the code itself which creates the decentralised system.
One of the major benefits of permissionless distributed systems is the transparency that they provide. However, broadcasting of information between actual or potential competitors in real time may soften competition because it can reduce strategic uncertainty in the market. Arguably, collusion risks are inevitably higher in permissioned scenarios. There is significant potential for the abuse of market power in limiting permission in a permissioned distributed ledger. Control of on- and off-ramps to the ledger and gatekeeper approaches to inter-ledger gateways all represent anti-competitive threats.
Rob Nicholls - UNSW Business School
Simonetta Vezzoso - University of Trento