Author:
(1) Johnnatan Messias Peixoto Afonso
Table of Links
CHAPTER 2: BACKGROUND
2.1 Blockchains & smart contracts
2.2 Transaction prioritization norms
2.3 Transaction prioritization and contention transparency
2.5 Blockchain Scalability with Layer 2.0 Solutions
CHAPTER 3. TRANSACTION PRIORITIZATION NORMS
CHAPTER 4. TRANSACTION PRIORITIZATION AND CONTENTION TRANSPARENCY
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Transaction Prioritization and Contention Transparency
4.2 On contention transparency
CHAPTER 5. DECENTRALIZED GOVERNANCE
CHAPTER 6. RELATED WORK
6.1 Transaction prioritization norms
6.2 Transaction prioritization and contention transparency
CHAPTER 7. DISCUSSION, LIMITATIONS & FUTURE WORK
7.3 Voting power distribution to amend smart contracts
Appendices
APPENDIX A: Additional Analysis of Transactions Prioritization Norms
APPENDIX B: Additional analysis of transactions prioritization and contention transparency
APPENDIX C: Additional Analysis of Distribution of Voting Power
Abstract
Blockchains revolutionized centralized sectors like banking and finance by promoting decentralization and transparency. In a blockchain, information is transmitted through transactions issued by participants or applications. Miners crucially select, order, and validate pending transactions for block inclusion, prioritizing those with higher incentives or fees. The order in which transactions are included can impact the blockchain final state.
Moreover, applications running on top of a blockchain often rely on governance protocols to decentralize the decision-making power to make changes to their core functionality. These changes can affect how participants interact with these applications. Since one token equals one vote, participants holding multiple tokens have a higher voting power to support or reject the proposed changes. The extent to which this voting power is distributed is questionable and if highly concentrated among a few holders can lead to governance attacks.
In this thesis, we audit the Bitcoin and Ethereum blockchains to investigate the norms followed by miners in determining the transaction prioritization. We also audit decentralized governance protocols such as Compound to evaluate whether the voting power is fairly distributed among the participants. Our findings have significant implications for future developments of blockchains and decentralized applications.
Publications
Parts of this thesis have appeared in the following publications and technical reports.
• “Understanding Blockchain Governance: Analyzing Decentralized Voting to Amend DeFi Smart Contracts”. J. Messias, V. Pahari, B. Chandrasekaran, K. P. Gummadi, and P. Loiseau. This work has been submitted and we are currently awaiting a decision.
• “Dissecting Bitcoin and Ethereum Transactions: On the Lack of Transaction Contention and Prioritization Transparency in Blockchains”. J. Messias, V. Pahari, B. Chandrasekaran, K. P. Gummadi, and P. Loiseau. In Proceedings of the 27th Financial Cryptography and Data Security (FC), Bol, Braˇc, Croatia, May 2023.
• “Selfish & Opaque Transaction Ordering in the Bitcoin Blockchain: The Case for Chain Neutrality”. J. Messias, M. Alzayat, B. Chandrasekaran, K. P. Gummadi, P. Loiseau, and A. Mislove. In Proceedings of the 21st ACM SIGCOMM Internet Measurement Conference (IMC), Virtual Event, November 2021.
• “On Blockchain Commit Times: An analysis of how miners choose Bitcoin transactions”. J. Messias, M. Alzayat, B. Chandrasekaran, and K. P. Gummadi. In 2 nd International KDD Workshop on Smart Data for Blockchain and Distributed Ledger (SDBD), Virtual Event, August 2020.
Additional publications and technical reports while at MPI-SWS.
• “Modeling Coordinated vs. P2P Mining: An Analysis of Inefficiency and Inequality in Proof-of-Work Blockchains”. M. Alzayat, J. Messias, B. Chandrasekaran, K. P. Gummadi, and P. Loiseau. June 2021. (Technical report)
• “(Mis)Information Dissemination in WhatsApp: Gathering, Analyzing and Countermeasures”. G. Resende, P. Melo, H. Sousa, J. Messias, M. Vasconcelos, J. Almeida, and F. Benevenuto. In Proceedings of the 28th Web Conference (WWW), San Francisco, USA, May 2019.
• “WhatsApp Monitor: A Fact-Checking System for WhatsApp”. P. Melo, J. Messias, G. Resende, K. Garimella, J. Almeida, and F. Benevenuto. In Proceedings of the 13th International AAAI Conference on Web and Social Media (ICWSM), Munich, Germany, June 2019.
• “Search Bias Quantification: Investigating Political Bias in Social Media and Web Search”. J. Kulshrestha, M. Eslami, J. Messias, M. B. Zafar, S. Ghosh, K. P. Gummadi, and K. Karahalios. In Information Retrieval Journal, Springer. Volume 22, Issue 1-2, April 2019.
• “On Microtargeting Socially Divisive Ads: A Case Study of Russia-Linked Ad Campaigns on Facebook”. F. N. Ribeiro, K. Saha, M. Babaei, L. Henrique, J. Messias, F. Benevenuto, O. Goga, K. P. Gummadi, and E. M. Redmiles. In Proceedings of the Conference on Fairness, Accountability, and Transparency (FAT*), Atlanta, Georgia. January 2019.
Acknowledgements
I would like to express my gratitude to my advisor, Krishna P. Gummadi, for his invaluable feedback and unwavering support throughout my PhD journey. I am also deeply thankful to Balakrishnan Chandrasekaran and Patrick Loiseau for their constructive insights and encouragement in my studies. I must also extend my appreciation to my previous advisor, Fabrício Benevenuto, whose consistent guidance and support carried me through this PhD journey.
Working alongside remarkable individuals from our Networked Systems group has been a privilege. I would like to thank Ayan Majumdar, Abhisek Dash, Camila Kolling, David Miller, Junaid Ali, Sepehr Mousavi, Till Speicher, Vabuk Pahari, Vedant Nanda, Nina Grgi´c-Hlaˇca, and many others who have made an impact in my PhD journey.
I extend my thanks to the exceptional research assistants at MPI-SWS, who enthusiastically celebrated every milestone in my doctoral studies. A special mention goes to Mohamed Alzayat, whose feedback and collaboration were instrumental as I embarked on my research topics. I am also grateful to Ahana Ghosh, Andi Nika, Andrea Borgarelli, Angelica Goetzen, Chao Wen, Debasmita Lohar, George Tzannetos, Heiko Becker, JanOliver Kaiser, Lennard Gäher, Matheus Stolet, Michael Sammler, Mihir Vahanwala, Nils Müller, Oshrat Ayalon, Pierfrancesco Ingo, Ralf Jung, Rati Devidze, Roberta De Viti, Victor Alexandru Padurean, Vaastav Anand, and many others for their steadfast support.
I am grateful for the vibrant interactions I had with interns who shared and discussed intriguing research ideas, with a special shoutout to Aleksa Sukovic, Ani Saxena, Ana-Andreea Stoica, Baltasar Dinis, Barbara Gomes, Daniel Kansaon, Diogo Antunues, Isadora Salles, Ignacio Tiraboschi, Lucas Costa De Lima, Maria Petrisor, Pedro Las-Casas, Ruchit Rawal, Sapana Chaudhary, and many others.
I am thankful to all MPI-SWS staff, in particular, Annika Meiser, Carina Schmitt, Christian Klein, Claudia Richter, Gretchen Gravelle, Krista Ames, Maria-Louise Albrecht, Rose Hoberman, and Sarah Naujoks for their sincere efforts and help during my PhD studies.
My appreciation extends to my wife Aline for her unwavering love and support throughout this journey. I also want to extend my thanks to my father, Jota Missias, my mother, Varlene, and my brothers, Joarlens and Jeanderson, for their unconditional support.
Introduction
Blockchains have the potential to transform traditional and centralized sectors of great societal importance, such as banking and finance (Adams et al., 2021; Daian et al., 2020; Perez et al., 2021; Qin et al., 2021). They provide a secure means of ensuring compliance via contracts (i.e., established agreements) and tamper-proof mechanisms, especially in situations where participants cannot trust each other (Nakamoto, 2008; Sasson et al., 2014; Van Saberhagen, 2013; Wood et al., 2014). As a result, there are many blockchains available such as Bitcoin (Nakamoto, 2008), Ethereum (Wood et al., 2014), Polkadot (Wood, 2016), Zcash (Sasson et al., 2014), Monero (Van Saberhagen, 2013), among others. Bitcoin and Ethereum stand out as the most widely used blockchains, with market capitalization surpassing $536.72B and $228.57B as of May 2023 (CoinMarketCap, 2023), respectively. In addition, blockchains have not only been used to implement cryptocurrencies, but are increasingly being adopted across a wide range of domains including insurance (Martin Ruubel, 2018), education (Philipp Schmidt, 2015), healthcare (Ekblaw and Azaria, 2017), supply-chain management (Provenance, 2015; Robert Hackett, 2017), decentralized governance (Adams et al., 2021; Leshner and Hayes, 2019; MakerDAO, 2023), and decentralized finance (DeFi) applications through smart contracts such as exchanges (Daian et al., 2020; Uniswap, 2023), lending (Perez et al., 2021; Qin et al., 2021), and auctions (Ethereum Foundation, 2023c).
In the blockchain space multiple parties interact with each other. These include: (i) transaction issuers who are responsible for issuing transactions via interactions with the blockchain and its applications through smart contracts; (ii) miners or block validators who ensure the validity of forthcoming information or blocks for inclusion within all its transactions; and (iii) smart contract applications that are software programs running atop a blockchain, capable of executing predetermined actions, creating or transferring tokens, enabling voting for smart contract amendments, etc. In any real-world scenario involving a diverse group of individuals with varying roles, establishing a foundation of trust and fairness becomes paramount to ensure that no one can take advantage of others.
Unlike the past, where interactions occurred mostly between individuals who knew and trusted each other, the rise of blockchain has enabled interactions within a decentralized system, devoid of inherent trust. However, in such a trustless environment, the potential for unfairness arises. One of the captivating aspects of blockchain systems is the interaction among participants who are strangers to each other, lacking pre-established trust. This raises questions about whether interactions are conducted fairly and what fairness concerns exist. For instance, in this thesis we focus on three primary unfairness issues: (i) Transaction ordering; (ii) Transaction transparency; and (iii) Fair distribution of voting power for smart contract amendments.
Fairness related to transaction ordering. The sequence in which transactions are processed is crucial, as everyone seeks timely processing. Ensuring fairness in this ordering presents challenges. For instance, how do we know that the ordering is fair?
In other words, noticeably absent from Bitcoin, Ethereum, and other decentralized blockchains is the requirement of any a priori trust between the users issuing transactions (i.e., registers persisted in the blockchain), the miners confirming transactions, and the peer-to-peer (P2P) nodes maintaining the blockchain. Despite their widespread use in ordering critical applications (Daian et al., 2020; Kharif, 2017; McCorry et al., 2017; Perez et al., 2021; Pilkington, 2016; Uniswap, 2023), blockchain protocols formally specify neither the manner by which miners should select transactions for inclusion in a new block from the set of all available transactions, nor the order in which they should be included in the block. While informal conventions or norms for prioritizing transactions exist, to our knowledge, before us no one has systematically verified if these norms were being followed by miners in practice (Messias et al., 2020, 2021, 2023a).
Studying this problem has significant implications for both blockchain users and miners. Specifically, when setting fees for their transactions, transaction issuers (i.e., through their wallet software) assume that the fees offered by all their competing transactions are fully transparent—our findings contradict this assumption. Similarly, when transactions offer different confirmation fees to different miners, it raises significant unfairness concerns with respect to the order in which these transactions are included. We also show that mining pools collude when prioritizing self-interested transactions for inclusion which can exacerbates the growing concerns about the concentration of hash rates amongst a few miners in proof-of-work blockchains (PoW) (Bahack, 2013; Gervais et al., 2016).
Fairness related to transaction transparency. Assumptions dictate that all participants can observe public transactions. This transparency impacts transaction prioritization and fee-setting. However, reality often diverges, leading to concerns about fairness in transaction transparency.
For instance, the lack of transparency in blockchains arises from genuine concerns of transactions issuers, which cannot be overlooked. One significant concern is the risk of transactions being front-run by bots (Daian et al., 2020; Eskandari et al., 2020; Torres et al., 2021; Weintraub et al., 2022), which creates the need for transaction privacy. Mining pools that address this need also facilitate, unsurprisingly, off-chain payments via which transaction issuers can (privately) incentivize the miners (BTC.com, 2022; Messias et al., 2021; ViaBTC, 2022). We consider these developments as natural and logical steps in the evolution of blockchains and back our assertions with empirical observations. In contrast to prior research (Daian et al., 2020; Strehle and Ante, 2020), we argue that the fundamental threat to blockchain stability lies in the opacity of the overall fees issued by transaction issuers. Most wallet software and crypto-exchanges currently rely on reconstructing the current public Mempool state to suggest an appropriate fee to transaction issuers. As a result, transaction issuers cannot precisely determine the fee required to ensure the inclusion of their transaction in the next block. Consequently, miners can overcharge them, as the “real” fees are opaque to the rest of the network (Weintraub et al., 2022).
Fairness related to voting power to amend smart contracts. Smart contracts, serving as trust-enforcing mechanisms, entail participants’ agreement with stipulated rules. However, as these smart contracts can be upgraded (or changed) it raises the question of who possesses the authority to modify them.
Put differently, blockchains face challenges related to decentralized decision-making processes for amending smart contracts. For example, blockchains have been explored by many prior works who studied different types of security vulnerabilities that arise from incorrect implementations or unintended (or undesired) executions of smart contracts over blockchains, particularly in the context of DeFi applications (Daian et al., 2020; Mike Dalton, 2022; Qin et al., 2021; Torres et al., 2021; Weintraub et al., 2022). However, few studies, if any, focused, however, on vulnerabilities that may originate in the design of the procedures to amend, i.e., change, smart contracts through governance protocols, and/or stem from the execution of these procedures in practice. These governance protocols intend to eliminate (or at least minimize) centralized decision-making in blockchains. Their effectiveness in achieving that goal can, however, be compromised depending on how the tokens (i.e., voting power—typically one token equals one vote) are distributed which can lead to voting concentration. Such concentration poses a threat to the overall governance of smart contract applications in blockchains leading, for example, to governance attacks (Mike Dalton, 2022).
Therefore, in this thesis, we also provide an in-depth analysis of the voting patterns, delegation practices, and outcomes of proposals in one of the widely used governance protocols: Compound (Compound Labs, Inc., 2022a; Leshner and Hayes, 2019). Since Compound records the votes cast transparently on a blockchain (i.e., it uses on-chain voting), we conduct measurements studies to analyze the extent to which this voting is decentralized, i.e., how small or large are the set of voters that determine the outcomes for the amendments.
It is important to acknowledge that our focus on these fairness concerns does not imply exclusivity. Additional concerns exist, such as fairness in compensating miners proportionately to their contributions. Nonetheless, in this thesis, we focus on the three aforementioned fairness concerns: (i) Transaction ordering; (ii) Transaction transparency; and (iii) Fair distribution of voting power for smart contract amendments.
This paper is
