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If the old competition rulebook has weathered the storm of digital economy so far, blockchain may pose too much of a challenge: it may bring a change of incentives that at least calls for more flexible and cooperative enforcement, albeit perhaps not a complete paradigm shift.
Author: Pablo Solano, expert in Competition and European Union Law
Blockchain is a distributed ledger of transactions based on decentralized verification by, and parallel recording in, all connected computers (nodes). Its functioning consists of the sequenced registering of “blocks” uniquely identified with a hash code. Each block’s code results from a cryptographic function that factors in the hash codes of both the previous block and all transactions that occurred since the previous block was registered, and a unique random number (nonce). Therefore, the content and sequence of blocks are, in principle, immutable.
Distributed validation is based on a protocol – i.e. the set of rules that govern access to, and information transfer on, the network and include a consensus algorithm for transaction verification. Consensus algorithms differ in the underlying computational logic, which may determine that validating nodes are chosen randomly (e.g. proof of work, or proof or elapsed time) or according to their stake in the network in the form of computing power or token-holding (e.g. proof of stake, proof of activity, proof of burn, proof of capacity, or practical byzantine fault tolerance).
The degree of influence over the protocol determines the ability to control the consensus and, hence, the network. From this perspective, blockchain networks may be (i) public (e.g. Bitcoin), where access is open and everyone may develop and run applications on it; (ii) permissioned (e.g. Libra), where users are identified by their pseudonyms so that a group of core participants may restrict their rights (to read or write transactions, to validate or to run applications); or (iii) private, where an entity or consortium have full control over the protocol and regulate participation.
The following main blockchain features and benefits may be fleshed out as backdrop to any competition assessment:
(i) Decentralization: Each node stores a copy of the record.
(ii) Transparency: Transactions are subject to peer validation and acceptance of blocks for registration based on a consensus algorithm.
(iii) Opacity: Blockchain relies on cryptographic functions generating hash codes, and pseudonymised identification of nodes by a public key, associated with a private key to be kept outside the network (in a wallet).
(iv) Multi-layer structure: The protocol is scripted on a platform level, on top of which run decentralized applications such as smart contracts (i.e. a permanent set of instructions to be automatically executed in reaction to certain events).
(v) Automaticity: The protocol is unstoppable in that it governs automatically the validation of all transactions happening at the application layer (although changes may be implemented through a hard or soft fork[1]).
(vi) Immutability: Blocks are sealed with a unique hash, which includes the hash of the previous block, and stored in every node so that their content and sequence cannot be tampered with.
Blockchain technology as an instrument for exogenous coordination
Against this background, the first source of potential concerns relates to the use of blockchain as a device for setting up or reinforcing independently existing coordination among rivals. This sort of “horizontal coordination” may amount to a “restriction by object” (i.e. infringements revealing such a degree of harm by their own nature that no analysis of anti-competitive effects is needed for them to be found unlawful) under Article 101 of the Treaty on the Functioning of the European Union and national homologues like Article 1 of the Spanish Competition Act.
Blockchain technology may be suspected to furnish a suitable platform for collusion among competitors. While external opaqueness may be regarded as sheltering illegal contacts or commercially sensitive information flows from watchdogs, internal transparency and the possibility to in‑build automatic reactions to certain events may be feared to facilitate detection of deviant behaviors and retaliation by colluders. Automation may also help enhance certainty of coordination if the terms of collusion are embedded in the design of the protocol or in ad hoc smart contracts. If endowed with artificial intelligence, smart contracts would even allow for adjustment of the focal point of collusion to reach an optimal balance and a just allocation of spoils.
The predictability of colluders’ behavior in blockchain environments may translate into enhanced stability of exogenous coordination by fostering trust. This could make colluders’ incentives less likely to change along the lifespan of collusion due to reduced fear or defection and detection and greater perceived fairness of the outcome. Even if their incentives do change over time, colluders may not be able to change their behavior accordingly owing to the unstoppability of blockchain-based agreements.
“What is clear is that this ambiguity demands a more fact-based analysis revolving around the type of governance arrangement, particularly the private or public character of the network and the type of consensus algorithm”
Some have seen in this a full-fledged shift away from the paradigm of competition as a non-cooperative game, where coordination is only a circumstantial second-best arrangement among parties that, in reality, mistrust one another and seek to outrival them. Hence, the effectiveness of detection mechanisms based on game-theoretic opportunism (as is leniency) could be threatened. Nonetheless, one could well make the converse point: the automaticity and immutability of blockchain-based agreements may discourage rivals from engaging in a commitment that would be set in stone. Alternatively, colluders could be driven to better plan or limit their involvement – e.g. by scheduling their stopping and resuming.
What is clear is that this ambiguity demands a more fact-based analysis revolving around the type of governance arrangement, particularly the private or public character of the network and the type of consensus algorithm. In private networks, greater obscurity means less probability of detection, and forks may be easily applied to remove traces (although higher observability of behavior in public networks may lead to more trust). Besides, if the consensus algorithm selects validating nodes based on their stakes, the risk of coordination may be higher (due to power concentration) than if selection is random. However, miners (i.e. nodes competing to be randomly selected as validators) may group in pools to improve their odds and, thus, increase their power[2].
Collusion in the development of Blockchain networks
One may also think of a collusive design of the network itself. This is clear where the terms of exogenous collusion are embedded in the protocol but governance rules may also lead in themselves to an anti-competitive outcome (e.g. laying down admission rules that exclude certain competitors). This, again, largely depends on the public or private character of the network, the consensus algorithm and the power and stake of certain users. For instance, core developers may implement soft forks or hard forks, and, in private networks, they may have regulatory powers – e.g. a casting vote to solve discrepancies.
In addition, consensus mechanisms introducing randomness in the selection of validating nodes, such as proof of work and proof of elapsed time, would intuitively reduce the risk of collusion, although miners may group in pools to improve their odds and, thus, increase their power. On the contrary, those algorithms that select validators according to their stakes may raise the incentives for coordination by favoring the concentration of power in the hands of a few powerful users. Plain users have less of an ability to meaningfully coordinate their behavior but they may have some influence if there are on-chain governance mechanisms in place, e.g. exercise of voting rights associated with token‑holding to approve or reject changes in protocol.
“Blockchain may not represent a re-write of the antitrust rule book as we know it but some well-established truths certainly may prove insufficient to capture its complexity”
Shortcomings of the traditional approach
The benefits of blockchain may not herald a re-write of the antitrust rule book as we know it but some well-established truths certainly may prove insufficient to capture its complexity. The most prominent is the attribution of liability because distributed ledgers are not companies (“undertakings” in antitrust jargon): they do not qualify as economic units, which is the atom of competition law. Neither are they stricto sensu markets because of the stigmergy resulting from a reduction of information asymmetry and opportunism. Even the concept of association of undertakings seems at odds with the decentralized nature of many blockchain features and benefits.
A “theory of granularity” has been proposed to establish whether there is a concurrence of wills at all (which is the pre-condition for an anti-competitive agreement to be found) and to allocate liability for it by looking into the specific balance of power and interest among blockchain members[3].
What seems certain is that the classic theory of facilitation (based on reasonable foreseeability of the consequences of the facilitation)[4] would not be enough to extend liability to validators straight away. The reason is that validation is inherent in the functioning of a distributed ledger, and cannot be given or withheld as a matter of due diligence.
Similarly, the inconspicuousness (or complete lack) of contacts and the possibility to schedule ceases and resumptions may make the theory of single and continuous infringement ineffective in bridging gaps in direct coordination – especially after the European Court of Justice (ECJ) censored its application to a conduct involving daily decisions (Euribor setting) in the absence of evidence of comparably frequent contacts.[5] Likewise, opacity of information flows risks making inoperative the presumptions of both subsequent collusive market behavior where strategic information is exchanged, and parent company liability for wholly owned subsidiaries’ conduct.”
The benefits of blockchain: Conclusions
Even if blockchain were not the revolution in antitrust enforcement that certain authors claim, it is indeed uncharted territory and, therefore, rigid doctrines largely based on experience will have to give place to case-by-case analysis. This is particularly necessary in light of the change in incentives for collusion, which may be expected to increase the quality and stability of agreements and colluders’ boldness to engage in more serious conduct but may not necessarily render them more numerous or durable.
The increased ambiguity and sophistication of practices, coupled with reduced attractiveness of leniency and absence of traceable evidence in the form of internal documents or external contacts, may force trustbusters to embark upon more collaborative and pro-active enforcement actions. These may include market screening, sandboxes, and advocacy (e.g. in the form of ex ante intervention in the setting up of governance rules). In the current debate over the credit to be given to compliance programs in attenuating antitrust liability, automation through smart contracts features unprecedented potential for self‑enforcement.
Pablo Solano is an associate at the Competition and European Union Law department at Uría Menéndez. His practice focuses on EU and Spanish competition law and EU law. He works on a wide variety of national and international cases before the Spanish and EU authorities in relation to abuse of dominance, agreements and strategic alliances, mergers, and state aid, on implementing compliance programmes, and on assignments regarding EU fundamental freedoms, market unity and proceedings for unfair competition infringements affecting the public interest.
Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.
[1] A soft fork is an upgrade of the protocol whereby old nodes will continue to recognise new blocks as valid – i.e. backward-compatible, so it only requires majority to succeed. A hard fork is an upgrade of the protocol whereby old nodes will no longer recognise new blocks as valid, so it needs unanimity to succeed.
[2] At the date of this contribution, seven pools validated 77 % of Bitcoin transactions (see https://www.blockchain.com/pools).
[3] See Schrepel, T., The Theory of Granularity: A Path for Antitrust in Blockchain Ecosystems, Harvard University, Utrecht University School of Law, Université Paris 1 Panthéon-Sorbonne, 14 January [2020].
[4] See case C-194/14 P Treuhand v Commission [2005].
[5] See case T-180/15 Icap and others v Commission [2017], and case C-39/18 P Commission v Icap and others [2019].