I am delighted to publish a 15-video series dedicated to my book, “Blockchain + Antitrust: The Decentralization formula”. You can access all the chapters over here, and all the video transcripts over here.
In this video, I’d like to address an issue that will become increasingly important over the next few years: what is blockchain power, what does it mean, and how to measure it? Let me recall that in the absence of market power, an economic entity cannot be found to be dominant. And if an entity is not dominant, then… by definition, it cannot abuse a dominant position. This means that Section 2 of the Sherman Act, Article 102 of the TFEU, and similar world prohibitions fall through.
So, what does market power mean, and how to measure it — outside blockchain? First, you need to define the relevant market which consists “of a group of substitute products”. That relevant market has two components: one material, the other geographical. The material market concerns the type of products or services that the average consumer considers substitutable indeed. For example, if we consider the market for coffee from consumers’ point of view, the question is whether tea is a substitute for coffee. And whether Coke, Pepsi, and energizers are also substitutes. If the average consumer considers that they are substitutes, we need to add the turnover of all the companies offering these products to calculate their market shares. The geographical market definition refers to the location within which one can show customers’ willingness to substitute one product for another. To follow up on my coffee example, the geographical market represents how much consumers are willing to walk to get a coffee. If the answer is 5 minutes, then all coffee shops within a 5-min perimeter are part of the same geographical market.
Now, how does it transfer to blockchains? Let me start with the relevant market. In this third video of this series, I introduced the difference between monocentric and platform blockchains. Monocentric blockchains can be used for only one application. The material market is then quite easy to define. Of course, platform blockchains are more challenging. I suggest we analyze which type of application(s) is at the core of the blockchain survival strategy and take it into consideration (see the seventh video for more explanations on that). But let me stress one difficulty here: are blockchain applications competing with centralized applications? Are they substitutable?
The answer depends on the type of product or service, and more specifically, the importance that blockchain characteristics can have. When trust is central in adopting a service, blockchain applications are not substitutable to centralized ones. To be concrete, several blockchains are used to document the supply chain of diamonds. Their immutability provides users with a special trust. It means they do not compete with similar services run outside the blockchain. And here, as a quick note, the geographical market follows the type of application. I don’t believe it raises specific difficulties.
OK, now that we have seen how to define the relevant market, let us move on to the analysis of market power. The logic consists in comparing all the market players in that relevant market. And here, antitrust agencies typically use market shares as a proxy, or at least as a starting point. Of course, market shares are not always sufficient, and other measures can complete them, but the analysis starts from here. This is where it gets tricky when it comes to blockchain.
One could calculate blockchain market shares by comparing the value of each blockchain’s tokens. All these tokens have correspondence in USD. It seems convenient, but as you know, their value fluctuates quite a lot. It could lead to considering one blockchain as dominant one day… and non-dominant the next. So… agencies could calculate an average over the yearly value of a token, similarly to what they do when converting foreign currencies… but ignoring strong fluctuations would lead to ignoring market reality. A blockchain whose value fluctuates greatly daily does not act as a company in a stable dominant position. We need another way to measure market power. Should we take the size of blockchains into account? Here, we could consider the number of users, wallets, or the number of transactions.
But generally speaking, I believe that structural analysis shows its limits when it comes to blockchain and, also, that behavioral elements will prove more helpful. The extent to which one blockchain’s miners and users are actually shifting their activities from one blockchain to another – which could be based on empirical evidence market screening, better translates market power than structural metrics. That information is largely available to antitrust agencies as blockchain records are public and immutable, thus making it easier for agencies to observe whether a user (public key) is still active and measure the flow between blockchains. Several agencies have shown they are open to behavioral elements, so we have reasons to be optimistic.
That is all for today. Thank you very much for listening. Take care of yourself, and, if you can, someone else too. Cheers.