Regulating Blockchain Consensus to Prioritize Legal Transactions

Summary

The paper proposes a regulatory framework that incorporates legal transaction confirmation into blockchain consensus. It argues that permissionless consensus protocols generally do not distinguish lawful from unlawful transactions, even when traded assets are subject to jurisdiction-specific rules. A case study of the Silk Road darknet market motivates the issue. The framework sets conditions under which the throughput of legal transactions can exceed that of ordinary transactions, which may contain an unknown mixture of legal and illegal activity.

The authors further argue that a small change to standard consensus execution policy, introduced through regulation, could maximize legal transaction throughput. This is a protocol and governance proposal rather than a trading strategy or empirical market analysis. The supplied description does not quantify the throughput conditions, explain how regulators would identify transaction legality, or assess effects on decentralization, enforcement, or cross-jurisdictional use. Its claims therefore depend on assumptions about regulatory authority and the feasibility of integrating legal review into consensus.

Key ideas

• The framework incorporates legal transaction confirmation into blockchain consensus.
• A Silk Road case study motivates the discussion of unlawful activity in cryptocurrency markets.
• The paper derives conditions for legal transactions to exceed the throughput of traditional transactions.
• It proposes changing consensus execution policy through regulation to maximize legal throughput.
• The supplied description does not specify enforcement mechanics or assess governance tradeoffs.

Tags

# A Regulatory System for Optimal Legal Transaction Throughput in Cryptocurrency Blockchains


# A Regulatory System for Optimal Legal Transaction Throughput in Cryptocurrency Blockchains









Permissionless blockchain consensus protocols have been designed primarily for defining decentralized economies for the commercial trade of assets, both virtual and physical, using cryptocurrencies. In most instances, the assets being traded are regulated, which mandates that the legal right to their trade and their trade value are determined by the governmental regulator of the jurisdiction in which the trade occurs. Unfortunately, existing blockchains do not formally recognise proposal of legal cryptocurrency transactions, as part of the execution of their respective consensus protocols, resulting in rampant illegal activities in the associated crypto-economies. In this contribution, we motivate the need for regulated blockchain consensus protocols with a case study of the illegal, cryptocurrency based, Silk Road darknet market. We present a novel regulatory framework for blockchain protocols, for ensuring legal transaction confirmation as part of the blockchain distributed consensus. As per our regulatory framework, we derive conditions under which legal transaction throughput supersedes throughput of traditional transactions, which are, in the worst case, an indifferentiable mix of legal and illegal transactions. Finally, we show that with a small change to the standard blockchain consensus execution policy (appropriately introduced through regulation), the legal transaction throughput in the blockchain network can be maximized.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.