Table of Contents

1. Introduction
2. Distributed ledger technology (DLT) and blockchain
   1. Terminology
   2. Fundamental objectives of blockchain
   3. Types of blockchain
   4. Multi-layered architecture of blockchain
   5. Main characteristics of blockchain
      1. Distributed ledgers
      2. Decentralized structure without intermediaries
      3. Consensus mechanisms
         1. Proof of Work
         2. Proof of Stake
3. Implications of blockchain on competition law
   1. The concept of “undertaking”
   2. Market definition
      1. Overview
      2. Current state of market definition
      3. Market definition based on type of blockchain
      4. Market definition based on block validation
      5. Market definition based on the layers of the blockchain
         1. Market definition on the base layer
         2. Market definition on the application layer
   3. Market power
      1. Existing methods
      2. Alternative approach for the determination of market power
         on the blockchain
4. Outlook

A. Introduction

During the last decade, competition authorities had to increasingly deal with digital business models (often described as operating in “digital markets”).^[1]In fact, one specific digital market does not exist; this terminology is a paraphrase for markets in the digital economy. However, authorities as well as the literature regularly speak of “digital … Continue reading While scholars and authorities were in the process of understanding how to adapt competition law in the context of digitalization, the next technological leap started to emerge. This article does not investigate the digital markets in general but the newly appearing infrastructure, the distributed ledger technology (DLT). With the DLT, once again particular markets are evolving; therefore, it is important to address the features of those new markets which are based on the DLT.

In contrast to the World Wide Web, which is the “internet of information”, DLT and blockchain^[2]See section B.I. for the terminological differences between these two. have been transforming the internet to the so called “internet of value”. Consequently, in DLT and blockchain, the digitally represented values, their ownership, access to them and transactions with these values are of importance.

DLT is not fully unknown to the Swiss^[3]Federal Law on the Adaptation of Federal Law to Developments in the Distributed Ledger Technology, 27 November 2019, BBl 2020, 233 et seqq. as well as the European^[4]Proposal for a Regulation of the European Parliament and of the council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, COM(2020) 593 final, 2020/0265(COD). The trilogues between … Continue reading regulators. Both authorities already reacted with the development of a normative framework for financial markets. In principle, policy and law intend to ensure optimal conditions for business activities with the aim that new technologies can meet the needs of society and markets. In the last few years, competition law academics started to shift their focus to DLT and blockchain issues and to also raise respective concerns.^[5]Schrepel Thibault, Blockchain + Antitrust: The Decentralization Formula, Cheltenham/Northampton 2021 (cit. Schrepel, Blockchain + Antitrust); Schrepel Thibault/Buterin Vitalik, Blockchain Code as … Continue reading

The topic of DLT and blockchain is still very much in progress, both technologically and legally, but a more in-depth exploration of the normative regulatory framework proves to be appropriate. This paper aims to understand the implications of DLT and blockchain on Swiss and European competition law. In order to assess those implications, the first section explains the fundamental technological features, i.e., section B. addresses the technology itself by setting the technical foundation (B.I.), showing the objectives of blockchain (B.II.), examining different types of blockchain (B.III.), pointing out the multi-layered architecture of blockchain (B.IV.) and taking a closer look at the main concepts of blockchain (B.V.).

In section C. the focus lies on the main implications of DLT/blockchain on substantive Swiss and European competition law. In this context, the chapters examine the concept of an “undertaking” under the applicable law and investigate possible consequences for blockchain business models (C.I.). Furthermore, the application of existing market definition tools to blockchain markets (C.II.) is of fundamental importance. In addition, the calculation and evaluation of market power also need some adaptation in the context of DLT and blockchain (C.III.). Lastly, section D. concludes this article and gives an outlook.

B. Distributed ledger technology (DLT) and blockchain

This section examines the technological characteristics of DLT and blockchain in detail. In this regard, it is important to clarify the functioning of the technology itself because the subsequent competition law related con­sid­er­ations require a conceptual understanding of DLT and blockchain.^[6]The following section is based on Weber Rolf H., DLT-Handelsplattformen: Spannungsfeld von Technologie und Recht, Zürich 2022 (cit. Weber, DLT-Handelsplattformen). This publication is not further … Continue reading

I. Terminology

DLT refers to a concept that allows data to be recorded and shared across distributed ledgers. It enables the recording, sharing and synchronization of transactions and data across a distributed network with participants all over the world, hence it is built on a peer-to-peer basis and operates without intermediaries, i.e., without centralized control.^[7]Baker Colleen/Werbach Kevin, Blockchain in Financial Services, in: Madir Jelena (ed.), FinTech, Law and Regulation, Cheltenham/Northampton 2019, 123 et seqq., marginal nos. 6.05 et seq. (cit. … Continue reading

Blockchain (literally a chain of data blocks) is a special type of data structure used in some distributed ledgers. New data (usually transactions) – after being validated by the participants – are stored on the blockchain, block by block and chronologically, and are thus linked together in a digital chain.^[8]Baker/Werbach, Blockchain in Financial Services, marginal no. 6.07; Ganne Emmanuelle, Can Blockchain revolutionize international trade?, Geneva 2018, 6 (cit. Ganne, Can Blockchain revolutionize); … Continue reading Blockchains use cryptographic and algorithmic methods to record and synchronize data across their networks; hence, the blocks are connected by cryptographic hashes.^[9]A cryptographic hash is a cryptographic fingerprint. When generating a hash, the algorithm receives a data input of arbitrary length and generates a deterministic result of predetermined length. For … Continue reading Each newly added block refers to the previous block; in this way, the technology ensures that a unique and traceable chain of blocks is created.^[10]Low Kelvin F.K./Mik Eliza, Pause the Blockchain Legal Revolution, In­ter­na­tional & Comparative Law Quarterly 2020, 135 et seqq., 137 et seq. (cit. Low/Mik, … Continue reading

“Distributed ledger” is a broader terminology describing distributed, syn­chro­nized, and cryptographically secured databases.^[11]Maull et al., Strategic Change 2017, 483. Therefore, in some situations it is necessary to speak of distributed ledgers rather than blockchain, since not all distributed ledgers record and store data in interconnected chains of blocks. In these cases, the distributed ledgers do not have the same so-called “immutability” as some blockchains.^[12]Low Kelvin F.K., Confronting Cryptomania: Can Equity Tame the Blockchain?, Legal Studies Research Paper No. 2020-01, Hong Kong 2020, 7 (cit. Low, Confronting Cryptomania); Low/Mik, International … Continue reading

II. Fundamental objectives of blockchain

The blockchain technology being called the “internet of values” focuses on digitally represented assets. Unlike on the World Wide Web, the rightful owner of any asset can be conclusively determined on the blockchain.^[13]Rutishauser Daniel/Kubli Ralf/Weber Rolf H., Grundlagen, in: Weber Rolf H./Kuhn Hans (eds.), Entwicklungen im Schweizer Blockchain-Recht, Basel 2021, 9 et seqq., marginal no. 4 (cit. … Continue reading

In addition, the assets or property rights on the blockchain are transferred in atomic transactions and not copied. The blockchain automatically ensures that a value on the blockchain (or on any other distributed ledger) exists only once and is assigned to a precisely identifiable owner. Due to the lack of a centralized authority, the data is (simultaneously) stored on the different decentralized nodes.^[14]Rutishauser/Kubli/Weber, Grundlagen, marginal nos. 4 et seq.

III. Types of blockchain

In relation to the authorization to validate, the accessibility to the blockchain and the possibility to participate on the blockchain, two main distinctions are necessary.

Firstly, blockchains can be qualified as permissioned or permissionless networks. The main difference between these two types of blockchain is whether anyone can validate a new block or whether doing that requires some kind of permission. Permissionless blockchains are of particular interest because on permissionless systems, anyone can create and validate the blocks or add transactions. Hence, the validators can be numerous.^[15]Ganne Emmanuelle, Blockchain’s Practical and Legal Implications for Global Trade and Global Trade Law, in: Burri Mira (ed.), Big Data and Global Trade Law, Cambridge 2021, 128 et seqq., 130 (cit. … Continue reading On per­mis­sioned systems, execution and validation is limited to the authorized participants. On these systems, a hierarchy (i.e., by defining different permissions for each group of participants) among the participants exists. It is necessary to pre-define the nodes in each group.^[16]Massarotto Giovanna, Using Blockchain-Based Smart Contracts To Enforce the Antitrust Consent, 11, available at <https://ssrn.com/abstract=4016740>; Ganne, Blockchain’s Practical and Legal … Continue reading These restrictions to certain nodes are applied by a controlling firm or by a consortium of firms (so called consortium blockchain).^[17]Pike Chris/Capobianco Antonio, Antitrust and the trust machine, OECD Blockchain Policy Series, 4 et seq., available at … Continue reading

Secondly, blockchains can be categorized into private and public blockchains depending on whether everybody or only the participating nodes in the network are able to access the blockchain. On public blockchains there is no restriction to access the blockchain itself; anyone can participate on the blockchain while keeping the anonymity. No specific user is given special authorization on any decisions as the validation of transactions relies on a pre-defined consensus mechanism.^[18]See section B.V.3. Consensus mechanisms. Rutishauser/Kubli/Weber, Grundlagen, marginal nos. 20 et seq.; Pike/Capobianco, OECD Blockchain Policy Series, 5; Nascimento/Pólvora, Blockchain now and … Continue reading On private blockchains, only authorized parties can view the transaction history. In addition, access to the system is restricted and the participants are in principle identifiable. Only a limited number of nodes are allowed to participate in the verification process. In this constellation, the system is protected not only technologically, but also organizationally by comprehensive sets of contracts and rules.^[19]Rutishauser/Kubli/Weber, Grundlagen, marginal nos. 20 et seq.; Pike/Capobianco, OECD Blockchain Policy Series, 5; Nascimento/Pólvora, Blockchain now and tomorrow, 14 et seq.; Salmon/Myers, … Continue reading

These two main distinctions can also be found in tech as well as law literature addressing blockchain but the terminologies are not always used con­sis­tently.^[20]See Deng Robert /Lee David Kuo Chuen, Handbook of Blockchain, Digital Finance, and Inclusion, Vol. 2, Cambridge MA 2017, 147; Low/Mik, International & Comparative Law Quarterly 2020, 138; see … Continue reading Finally, the categorization of blockchains presented here is not exhaustive; hybrid systems in particular also exist in the real world.

IV. Multi-layered architecture of blockchain

Blockchains usually use a multi-layered architecture with distinct purposes of each layer. In the context of the internet, for example, a distinction between the infrastructure layer, the data layer, the software layer, and the application layer is applied. In the context of blockchain,^[21]For other examples of multi-layered architecture in blockchain, see Pajooh Houshyar Honar et al. Multi-Layer Blockchain-Based Security Architecture for Internet of Things, sensors 2021, 772, 1 et … Continue reading Decentralized Finance (DeFi) is a good example for the multi-layered architecture because DeFi consists of five different layers, namely the settlement layer, the asset layer, the protocol layer, the application layer, and the aggregation layer.^[22]For the internet layers, see Weber Rolf H., Zivilrechtliche Haftung auf dem Information Highway, in: Hilty Reto M. (ed.), Information Highway. Beiträge zu rechtlichen und tat­säch­li­chen … Continue reading For the purpose of this article, only the settlement layer, asset layer and application layer will be discussed.^[23]For a comprehensive explication of all layers on DeFi, see Schär, Federal Reserve Bank of St. Louis Review 2021, 155 et seqq.

The settlement layer of DeFi represents the used blockchain for the system. Hence, the settlement layer consists of the blockchain and the native protocol asset (e.g., Bitcoin on the Bitcoin network or Ether on the Ethereum network). The settlement layer can be understood as the foundation.^[24]Schär, Federal Reserve Bank of St. Louis Review 2021, 155 et seq.

The asset layer encompasses all assets issued on the settlement layer. Besides the native protocol assets, the asset layer also consists of tokens, which are digital assets that have not been issued on the native protocol.^[25]Schär, Federal Reserve Bank of St. Louis Review 2021, 156; Roth Jakob/Schär Fabian/Schöpfer Aljoscha, The Tokenization of Assets: Using Blockchains for Equity Crowdfunding, in: Wendt Karen (ed.), … Continue reading

On the application layer, user-oriented applications are created. These applications connect different protocols and provide a user-friendly ex­pe­ri­ence. The application layer usually is closely linked to the user interface as it facilitates the interaction with the smart contract, and as a result, the protocols are easier to use.^[26]Schär, Federal Reserve Bank of St. Louis Review 2021, 156.

V. Main characteristics of blockchain

Various blockchains are often considered secure because of the lack of potentially “untrustworthy” intermediaries. In the following, the most important concepts and technological foundations of blockchain are explained in order to create a basic understanding for the legal analysis of blockchain in context of competition law.^[27]See also Schär Fabian/Berentsen Aleksander, Bitcoin, Blockchain, and Cryptoassets, Cambridge MA/London 2020, 31 seqq. (cit. Schär/Berentsen, Bitcoin, Blockchain, and Cryptoassets).

1. Distributed ledgers

In distributed ledgers, as mentioned above, neither a single party ever has control over the entire ledgers nor is the data ever stored centrally in one place; rather, various mirrors with the same information are distributed across several nodes. Therefore, these nodes replace to role of a central party in a “traditional” setting with intermediaries.^[28]Low, Confronting Cryptomania, 7; Ganne, Can Blockchain revolutionize, 6. With this concept, a consensus mechanism is necessary: the participants themselves are responsible for verifying and validating the data blocks using this mechanism,^[29]Weber Rolf H., Handel mit digitalen Aktiven, in: Weber Rolf H./Kuhn Hans (eds.), Entwicklungen im Schweizer Blockchain-Recht, Basel 2021, 165 et seqq., marginal no. 11; Low, Confronting … Continue reading which replaces trust in the counterparty. The activity of all participants is based on a protocol that contains instructions for the entire network. Usually, this code is “open source”, i.e., it can be viewed and understood by all participants.^[30]Rutishauser/Kubli/Weber, Grundlagen, marginal no. 15.

2. Decentralized structure without intermediaries

According to the description as “internet of values”, one of the main functions of transactions on the blockchain is how much (and what kind of) value has been transferred from one party to another. The data of each transaction or bundle of transactions can be represented as a block on the blockchain. Each block has a header, which contains all the information necessary to classify and validate a block, and a body, which describes the transaction to be re-registered. Since each block in the chain builds on the previous block, it is possible to trace the entire chain; a newly created block contains the hash of the previous block.^[31]Rutishauser/Kubli/Weber, Grundlagen, marginal no. 16.

3. Consensus mechanisms

There are two types of users on the blockchain: those who only register transactions and those who provide the computing power to validate a transaction. The participants of the second group are responsible for finding the consensus – based on a specific pre-selected consensus mechanism. The consensus mechanisms are – contrary to the name – not of a democratic nature, but fully automated, deterministic, and algorithm-driven validation processes. Validation thus depends on the fulfilment of certain technological conditions; in principle, a node or the person behind it cannot decide for itself whether to reject a transaction that fulfils all validation criteria or to accept a transaction that does not fulfil the validation criteria.^[32]Low/Mik, International & Comparative Law Quarterly 2020, 140 et seq. In practice, the following two methods are established consensus mechanisms:^[33]Rutishauser/Kubli/Weber, Grundlagen, marginal nos. 22 et seqq.; Schär/Berentsen, Bitcoin, Blockchain, and Cryptoassets, 139 et seqq.

a) Proof of Work

If the blockchain opted for proof of work, all participants attempt to solve a complex proof of work instance (a complex calculation).^[34]Strictly speaking, this is not a common mathematical calculation, but a complex procedure, see Gervais Arthur et al., On the Security and Performance of Proof of Work Blockchains, CCS ‘16: … Continue reading Proof of work builds on the asymmetry of calculation and verification, because the calculation requires immense computing power, while the verification of the solution is simple. The first party to find the solution receives a reward and the other participants can simply verify the solution. This described verification process is called mining, because after the verification a new block is added to the blockchain. Proof of work is an established method for reaching consensus (e.g., used in the Bitcoin network).^[35]Nakamoto Satoshi, Bitcoin: A Peer-to-Peer Electronic Cash System, available at  <https://bitcoin.org/bitcoin.pdf>.

b) Proof of Stake

When using proof of stake, validation is not carried out via the computing power of the participants, but via deposited cryptocurrencies (so far generally not via cryptoassets). Proof of stake systems consist of validators who lock their assets (staked coins) and those who merely hold the cryptocurrency of the corresponding system. Validators propose the potentially next valid block through a weighted random selection, which is determined by the participation time and/or the percentage relation to the deposited cryptocurrencies and vote on its validity. The voting power of the validators depends on the size of their deposited portfolio.^[36]Antonopoulos Andreas M./Wood Gavin, Mastering Ethereum, Building Smart Contracts and DApps, Beijing 2019, 321 (cit. Antonopoulos/Wood, Mastering Ethereum).

Staking is complemented by slashing. Slashing is used to punish unfair or malicious behavior of validators. Hence, validators are exposed to the risk of losing their entire deposit or parts of the staked cryptocurrencies.^[37]Rutishauser/Kubli/Weber, Grundlagen, marginal nos. 22 et seqq.; Chentouf Fatima Zahrae/Bouchkaren Said, Blockchain for Cybersecurity in IoT, in: Maleh Yassine et al. (eds.), Artificial … Continue reading But validators also receive a small reward proportional to their staked coins; this reward-punishment mechanism forces validators to act honestly and follow the consensus protocol.^[38]Antonopoulos/Wood, Mastering Ethereum, 321.

Furthermore, proof of stake is supposed to be substantially less energy intensive. It is said that the Ethereum Merge in mid-September 2022 (a software upgrade swapping the platforms consensus mechanism from proof of work to proof of stake) will speed up the execution of transactions on the blockchain and significantly reduce energy consumption (estimations of 99% energy re­duc­tion).^[39]Born Mathias, Ethereum senkt Stromverbrauch: Wie Bitcoin, nur bio, Tages-Anzeiger of 15.09.2022, available at … Continue reading

C. Implications of blockchain on competition law

The following section analyses the implications of blockchain on competition law based on Art. 102 TFEU^[40]Consolidated version of the Treaty on the Functioning of the European Union, OJ C 326, 26.10.2012, 47–390. and Art. 7 CartA^[41]Federal Act on Cartels and other Restraints of Competition of 6 October 1995 (CC 251; Status as of 1 January 2022). in particular. It focuses on fundamental questions regarding the application of competition law in a blockchain environment. First, an overview of the concept of an undertaking and how blockchain might affect the approach to define an undertaking is necessary. Furthermore, the market definition of blockchain business models needs further investigation. Then, the determination of market power in the context of blockchain will be discussed and the last part addresses possible examples of abuse of power.

I. The concept of “undertaking”

In competition law, various articles apply to “undertakings” (e.g. TFEU Title VII, Chapter 1, Section 1: Rules applying to undertakings). Art. 101 and 102 TFEU explicitly mention the undertakings. In Swiss competition law, Art. 2 para. 1 CartA clearly states the scope of the Act which “applies to private or public undertakings that are parties to cartels or to other agreements affecting competition, which exercise market power or which participate in concentrations of undertakings”.^[42]With emphasis added. The structure of blockchain^[43]See section B.V. Main characteristics of blockchain. inherently contains some implications on the concept of the undertaking. First, in a distributed ledger, which blockchain is a part of, one single party never has control over the whole structure. Further, the consensus mechanisms allow to make certain decisions within the blockchain. These two circumstances together raise concerns over who controls an economic entity and who is with which assets liable for actions taken by this economic entity, be it an undertaking or a firm.

The concept of undertakings in the context of blockchain has already been discussed in detail by Schrepel and Lianos.^[44]Schrepel, Blockchain + Antitrust, 80 et seqq. with special focus on the “firm” (esp. 109 et seqq.); Lianos Ioannis, Blockchain Competition, Centre for Law, Economics and Society Research Paper … Continue reading It is especially important to also consider the “firm” besides defining the concept of “undertaking”. For this purpose, Schrepel has developed a theory of granularity. He distinguishes between different participants and defines a “nucleus”. According to Schrepel, the nucleus is “a group of participants [that] may achieve a form of control over the blockchain by collaborating, by circumventing (some of) the constraints imposed on them, and by changing them in the long run.”^[45]Schrepel, Blockchain + Antitrust, 123. Therefore, this nucleus should “become a legal fiction that can be liable for anticompetitive practices, but also able to claim damages.”^[46]Schrepel, Blockchain + Antitrust, 124; similarly, Lianos, Blockchain Competition, 79 et seq. Hereinafter this view of Lianos and Schrepel related to the concept of undertaking is applied.

II. Market definition

1. Overview

The definition of the market requires a twofold approach: First, this section explains why a market definition is still necessary even though in the 2010s an increasing number of papers discussed the abandonment of market definition.^[47]Especially the papers by Kaplow were influential: Kaplow Louis, Market definition: impossible and counterproductive, Antitrust Law Journal 2013, 361 et seqq.; Kaplow Louis, Why (Ever) Define … Continue reading Then, the current state of market definition in the European Union and in Switzerland is described in order to demonstrate this article’s approach to “blockchain markets”.^[48]In fact, a “blockchain market” per se does not exist. In the context of competition law, there is no such thing as one “blockchain market”, one “digital market” or one “multi-sided … Continue reading

When defining markets in the context of blockchain, the characteristics of this new infrastructure need to be considered. First of all, a distinction between public/private and permissionless/permissioned blockchains is necessary. Secondly, the type of validation on the blockchain plays an important role in delineating the market. Furthermore, when developing a market definition, the authorities need to always assess the multi-layered architecture of the blockchain. Lastly, as a comprehensive and reoccurring topic, the general concept of blockchain must be reflected in the market definition.

2. Current state of market definition

According to Kaplow “the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely”.^[49]Kaplow, Harv. L. Rev. 2010, 437. Kaplow is, in particular, of the opinion that the market definition is useful in a market with homogenous products but useless if applied in redefined markets.^[50]Kaplow, Harv. L. Rev. 2010, 441. Furthermore, he argues that the market definition is the first step in antitrust proceedings which is used to assess the market share of a firm or undertaking. From this share, then, one (automatically) infers the degree of market power.^[51]Kaplow, Harv. L. Rev. 2010, 439.

This line of argumentation does not work in the context of European and Swiss law. While the market definition is a tool for determining market power, the authorities are still obliged to analyze the market position of the undertaking under investigation. This market analysis considers market shares but does not automatically infer any market power from it. Instead, the authorities also take the market structure (i.e., potential competition, barriers to entry), the company structure (i.e., economies of scale, technological lead) and the general market behavior into account.^[52]LMRKM Kartellrecht, Kommentar zum Deutschen und Europäischen Recht, Loewenheim Ulrich et al. (eds.), 4th ed., Munich 2020, LMRKM Kartellrecht-Bergmann/Fiedler, Art. 102 marginal nos. 117 et … Continue reading Even though extraordinary market shares are an indicator for market power in the European Union and in Switzerland,^[53]LMRKM Kartellrecht-Bergmann/Fiedler, Art. 102 marginal nos. 118 et seq. In Switzerland, the Federal Supreme Court of Switzerland states that high market shares are a strong indicator for market … Continue reading their authorities only consider the market share among other important factors. In the digital economy, in particular, the market share starts to lose importance because of the dynamic and innovative markets; this is not different in markets based on blockchain.

Therefore, the authorities of the European Union and of Switzerland still hold on to a market definition; their methods remained constant for decades and the market definition still is a prerequisite for analyzing market power. Both authorities usually consider the demand side substitutability and the SSNIP test. The former has even been codified in the Merger Control Ordinance (MCO), according to Art. 11 para. 3 lit. a MCO, “[t]he [relevant] product market comprises all those goods or services that are regarded as interchangeable by consumers on the one hand and by suppliers on the other hand”.^[54]Ordinance on the Control of Concentrations of Undertakings (MCO) of 17 June 1996 (CC 251.1; Status as of 1 January 2013).

According to the demand side substitutability, products and services which are interchangeable based on their characteristics, the price level and the intended use belong to the same market. The focus is on the functional interchangeability of the goods from the point of view of the market counterparty. Price, quality, availability, consumer preferences and barriers to market entry must be considered.^[55]Basler Kommentar zum Kartellgesetz, Amstutz Marc/Reinert Mani (eds.), 2nd ed. Basel 2022, BSK-Reinert/Wälchli, Art. 4 para. 2, marginal no. 102 (cit. BSK-Author); LMRKM … Continue reading

The SSNIP test examines how consumers would react to a hypothetical, small but significant and non-transitory price increase of 5%-10%. If consumers switch to other goods or services, the next best substitute is also included in the analysis. Then it is again examined whether a hypothetical price increase of 5%-10% of these two goods or services would be profitable for the undertaking. If this is the case, these two goods form the relevant product market. This test is usually conducted until the price increase of the identified group of products or services would no longer lead to a switch to another product or service.^[56]BSK-Reinert/Wälchli, Art. 4 para. 2, marginal nos. 116 et seqq.; LMRKM Kartellrecht-Bergmann/Fiedler, Art. 102 marginal no. 41.

3. Market definition based on type of blockchain

One possible method of defining a market is by differentiating the various types of blockchain (e.g., having a market for public blockchain and a market for private blockchain). Especially the private blockchains can be of sig­nificance for competition authorities because they could conduct an­ti­com­petitive practices by excluding certain users (in this context, comparisons to sporting associations may be appropriate). It is easily possible that – if a user is excluded from accessing the infrastructure of a blockchain – an infrastructure is regarded as essential facility if there are no suitable alternatives and the infrastructure can deny access. This issue, however, only concerns private and/or permissioned blockchains which are much less in use compared to public/permissionless blockchains.

Nevertheless, the distinction between these types of blockchain raises another question: Can a product or service be interchangeable if offered on opposing types of blockchain? Similar to online and offline markets, this question cannot be answered generally. Rather, one must conduct a “traditional” market definition (with demand side substitutability or the SSNIP test) to infer whether any two products or services (be it on public or private blockchain) are interchangeable. Therefore, it is theoretically possible that two products or services are interchangeable based on their characteristics, the price level, and the intended use even though one is on a public blockchain and the other is on a private blockchain. However, price, quality, availability, consumer preferences and barriers to market entry must also be considered. Consequently, the substitutability equally depends on the level of privatization of the blockchain.

4. Market definition based on block validation

The still limited literature on competition law in the context of blockchain suggests delineating markets based on block validation.^[57]Deuflhard Florian/Heller C.-Philipp, Defining Relevant Markets in the Crypto Economy, TechREG CHRONICLE February 2022, 1 et seqq., 4 et seqq. (cit. Deuflhard/Heller, Defining Relevant Markets). It is surprising that the authors assume separate markets based on consensus mechanisms without providing any explanation as to why.^[58]“The markets for the two consensus mechanisms are likely separate.” (Deuflhard/Heller, Defining Relevant Markets, 4). Based on that assumption, they apply the SSNIP test to these “markets”. It is, however, questionable if those markets do even exist because of the difficulty to grasp the fact that a type of internal organization is being analyzed in these cases. As mentioned above, these consensus mechanisms are an inherent part of distributed ledgers (thus also blockchains) because of the lack of intermediaries and the need of trust towards the counterparties. Therefore, the consensus mechanisms do not provide any insight in interchangeability or – more generally – in competitive constraints.

The main goal of the market definition is to define the framework for the antitrust analysis. It aims to determining the competitive constraints con­cern­ing the undertaking under investigation. The competitive constraints, however, cannot be identified based on internal organizational structure. The consensus mechanisms can be compared to (internal) decision-making mechanisms in different types of undertakings (e.g., a voting in the general assembly of a shareholder company where they decide on internal matters without any influence to the market definition in competition law). In traditional competition law, one does not define markets based on the type of company (e.g., public stock company, limited company etc.). Competition authorities rather consider the economic activities of these undertakings and then decide that different types of companies belong to the same market. The same logic should apply to blockchains.

Therefore, it is not convincing to base market definition on block validation types.

5. Market definition based on the layers of the blockchain

As mentioned, blockchains use a multi-layered architecture. This architecture has important effects on the approach of market definition. For the purpose of a market definition, it is important to distinguish the different layers and identify the layer that is impacted.^[59]See also Schrepel, Blockchain + Antitrust, 185. Most likely, products and services on each layer are not interchangeable with products and services on other layers as they do not provide functional interchangeability and/or consumers could not change to a product or service on another layer.

a) Market definition on the base layer

The base layer of blockchain (in the context of DeFi, it is called the settlement layer) must be considered at the beginning. As explained above, the base layer provides the infrastructure on which everything relies on. In the case of blockchain, the base layer usually contains the used blockchain for the system, thus the base layer consists of the blockchain itself and the native protocol asset. Regarded as the foundation, everything bases on the Bitcoin network or Ethereum network (or any other network).

This base layer of the blockchain can be compared to the infrastructure layer of the internet. The internet (or its infrastructure) can be seen as a network of networks that is linked together.^[60]Krol Ed/Hoffman Ellen S., FYI on “What is the Internet?”, May 1993, available at <https://www.rfc-editor.org/rfc/rfc1462.html>, 1 et seqq. While competition authorities have dealt with a myriad of cases regarding the internet (more specifically based on the internet), the question of defining a market along the infrastructure never came up. The same thought process can be applied to the base layer of blockchain.

Even though there are different protocols and infrastructures of blockchain (as mentioned Bitcoin network, Ethereum network, but also Tezos network and others), they are mainly public blockchain networks.^[61]See section B.III. Types of blockchain. Similar to the internet infrastructure, these public and/or permissionless blockchain infrastructures do not present any problems.^[62]See section B.III. Types of blockchain. Therefore, at least for the time being, this base layer does not seem to pose any difficulties regarding market definition.

Even if the blockchain infrastructure is viewed as a platform, hence as its own ecosystem, it is questionable whether it may constitute its own market. Even with digital ecosystems, authorities tend to struggle when defining “ecosystem markets”, with good reasons. While at first sight, ecosystems might seem to be competing against each other, a general definition of ecosystem markets may lead to erroneous markets, especially when keeping in mind that the goal of the market definition is to consider competing, substitutable products and services from the point of view of the consumers. It is rare that consumers will consider whole ecosystems as interchangeable; they rather care about single products in an ecosystem.

A similar approach is necessary when analyzing blockchains. It is not reasonable to view whole blockchain infrastructures (or ecosystems) as general substitutes. In this case, it would be more accurate to investigate each application on the blockchain.^[63]See section C.II.5.b). Market definition based on the layers of the blockchain.

Another point of view is the qualification of a blockchain as a platform.^[64]Pike/Capobianco, OECD Blockchain Policy Series, 6; Hoffer Raoul/Mirtchev Kristina, Erfordert die Blockchain ein neues Kartellrecht?, Neue Zeitschrift für Kartellrecht 2019, 239 et seqq., 241 (cit. … Continue reading This approach has the advantage of being (comparatively) easy to understand as it bases its core logic on platform theories of digital businesses. According to Pike/Capobianco, blockchains “compete to attract both users and validators” while the blockchain itself “should be seen as platform products”. As mentioned above, the blockchain is not a product nor does it intend to be one. The blockchain is just one type of distributed ledger that provides an infrastructure for new types of applications with self-regulation as described hereinafter.

Such a concept of self-regulation needs further explanation. According to Tombs, regulation ensures the absence of chaos. Without regulation, actors of society – or for that matter of any environment – tend to cheat. Therefore, regulation suppresses and avoids these actors or these behaviors;^[65]Tombs Steve, Understanding Regulation?, Social & Legal Studies 2002, 113 et seqq., 114. self-regulation aims to do the same as governmental regulation with the difference that the decisions to self-regulate stem from the community itself. Self-regulation has several advantages: the rules created by the participants of a given community are fundamentally efficient, as they respond to real needs, reflect technology, and offer the possibility to flexibly adapt the legal framework to the changing environment. Since self-regulation is negotiated by the stakeholders involved, there is a high probability that such rules will be widely accepted.^[66]Weber Rolf H., Sectoral Self-Regulation as Viable Tool, in: Mathis Klaus/Tor Avishalom (eds.), Law and Economics of Regulation, Cham 2021, 25 et seqq., 26; Weber Rolf H., Realizing a New Global … Continue reading

On the blockchain, self-regulation is an integral part of the concept itself. The participants of any blockchain (and application on the blockchain) may – depending on the structure of the blockchain^[67]For detailed explanation of the structure of the blockchain, see section B.V. Main characteristics of blockchain. and the content of the smart contract^[68]See footnote 71 for further remarks on the smart contract. – also regulate business decisions acting as something similar to the general assembly of a company (more specific as the shareholders of a company). Therefore, it is wrongful to treat a blockchain as a platform product; for that reason, this comparison is flawed.

Furthermore, the core idea of digital platforms is having the function of a central party, the so-called intermediary, while the whole structure of blockchains is based on the lack of intermediaries. Therefore, this comparison is misleading as well.

However, if ever a market definition on the base layer is necessary, the approach of Schrepel comes closest of being applicable. He identifies substitutable blockchains on the demand side based on their nucleus.^[69]Schrepel, Blockchain + Antitrust, 130. While this method is possible, it may result in a too narrow view of markets. It is correct that the nucleus of a blockchain has to some extent control over the blockchain and may impose constraints on the blockchain. Even so, this should not be the approach when considering the whole infrastructure.

If authorities need to define markets on the infrastructure layer, it is important to find the opposite market side.^[70]Market definition is conducted from the perspective of the opposite market side (BSK-Reinert/Wälchli, Art. 4 para. 2, marginal no. 102; LMRKM Kartellrecht-Bergmann/Fiedler, Art. 102 … Continue reading On the infrastructure layer, the opposite market side are the undertakings that seek the service of the infrastructure which is the use of the blockchain. All blockchain networks provide the same service – a blockchain. Here, a broader approach may be necessary because first of all, authorities need to decide whether blockchains and other distributed ledgers are interchangeable. As mentioned above, the special characteristic of blockchains is the chronological linkage of blocks which are connected by cryptographic hashes and constitute a unique and traceable chain. Other distributed ledgers may have fundamentally different structures which may not be favorable for certain use cases. Hence, depending on the exact use case, the substitutability of blockchains with other distributed ledgers needs to be evaluated.

Once this is determined, in a second step, the question of private/permissioned and public/permissionless blockchain arises. Here again, depending on the exact use case of the blockchain, it is possible that all types are substitutable. But if an undertaking (or a state) needs to use a specific type of blockchain to be able to hold control, only private or permissioned blockchains may be substitutes.

b) Market definition on the application layer

The actual challenge for a market definition on the blockchain is at the application layer that can remotely be compared to different websites on the internet (or even different applications on different “app stores”). An application runs on the base layer and are a user-friendly interface that allow interaction with the smart contract^[71]The smart contract is based on predetermined rules (if-then rules); if the smart contract is stored on the blockchain and a predefined scenario occurs, then the contract is automatically executed – … Continue reading and other protocols of the blockchain.

On the application layer, again, different distinctions are necessary. Firstly, only applications on one specific blockchain network may be substitutes. Then, one may view all applications on public or private blockchains as sub­sti­tutes. Lastly, it is also possible to assume interchangeability of ap­pli­ca­tions independent of the blockchain network they are based on (only based on their products or services).

The first approach needs to be rejected. It is not reasonable to narrow the substitutes of an application to its existence on any specific blockchain network. The reasoning here is twofold: Firstly, market delineation on the base layer usually only concerns the undertakings deciding on which blockchain network they are willing to build their application. Secondly, users of the applications are seeking the services of said application and not the blockchain the application is based on. Therefore, it is not right to discard all applications on other blockchain infrastructures from the very beginning without conducting any reasonable market definition.

The second approach is more intricate. While there is some truth in the fact that private/permissioned and public/permissionless blockchains may not be interchangeable to some users, this question usually regards the undertakings building their applications on a specific blockchain network. From the perspective of the end users, however, the actual product or service of the application itself is of importance. Therefore, private/permissioned and public/permissionless blockchains may be considered to the extent that they constitute an inherent part of their product or service. Hence, competition authorities should not delineate markets for applications just on the mere fact that they are built on private/permissioned or public/permissionless blockchains.

The last approach will be – in most cases – a suitable approach. Applications shall not be excluded in advance from the scope of the market definition because of the network they are based on or because of the type of blockchain they are part of.^[72]Similarly, Pike/Capobianco, OECD Blockchain Policy Series, 6.

When defining the market on the application layer, the demand side substitutability provides satisfying results. Here, comparisons to multi-sided markets^[73]To some extend Pike/Capobianco, OECD Blockchain Policy Series, 6. need to be prevented. While applications on the blockchain may provide similar services to applications on the digital economy, their fundamental structure is different. Applications in the digital economy are based on multi-sidedness with the application (or the platform) as the intermediary of the business. On the blockchain, this is logically not possible. Blockchains do not have any intermediary that is connecting two (or more) sides together. The blockchain, as a distributed ledger, is typically a public database distributed across multiple locations, countries, and institutions. Each computer interacting with the blockchain constitutes an own node that cannot be allocated to any side. Hence, the application itself, as a whole, needs other applications as substitutes which constitute the market.^[74]Not entirely matching, but with a similar thought process Pike/Capobianco, OECD Blockchain Policy Series, 6.

On this level of market definition, the use of the SSNIP test is possible too. The approach of applying the SSNIP test on this layer of the blockchain can be situated between its applications on “traditional” markets and digital markets. On digital markets, the SSNIP test tends to meet problems with the small but significant and non-transitory increase of price because most of these services are free of charge. To overcome this issue, it has been suggested to have a SSNDQ test (small but significant and non-transitory decrease of quality)^[75]Filistrucchi Lapo, Market Definition in Multi-Sided Markets, in: OECD (ed.), Rethinking Antitrust Tools for Multi-Sided Platforms, 37 et seqq., 47 et seq.; Smith/Duke, ECJ 2021, 104 et seq. or that “the SSNIP should be applied to the (weighted) average competitive price applicable to the particular platform business”.^[76]Smith/Duke, ECJ 2021, 104 et seq.

Applications on the blockchain, however, are not fully comparable to these platform businesses; for competition authorities, it may even be easier to define markets for the application layer on the blockchain. The SSNIP test needs no adaptation of the method itself but only on where it is applied. The general use of an application is mostly free of charge on the blockchain, but as mentioned in the introduction, the blockchain can be seen as the internet of values. The blockchain focuses on digitally represented assets, their ownership, access to them, and transactions with these assets. The latter concept is the foundation to the other use cases. A digitally represented asset, its ownership, and access to it only is useful if a transaction proceeds them.

Therefore, any use of an application usually intends to conduct a transaction at some point. Hence, it is possible to assess the SSNIP test on said transactions. Depending on the blockchain network and the application that is being used, users need to pay a certain fee for such transaction, in most cases the native token of the application. These amounts are either measured at a percentage rate of the whole transaction or are a fixed amount. Here, the SSNIP test is applicable because a small but significant and non-transitory increase of price (here the price of each transaction) is very much possible.

Again, it is not reasonable to differentiate the applications based on the consensus mechanism.^[77]For the consensus mechanisms, see section B.V.3. The consensus mechanisms are in fact important for internal matters of each application, but this is usually of no importance to the users. The users seek the service (or product) of said application. As mentioned above, this can be compared to the internal structure of any given undertaking in the “traditional” markets. When deciding whether any two products (or services) are substitutes, it is not of any relevance whether the undertaking providing the product (or service) is a limited company or a public stock company. Similarly, it cannot be of importance whether decisions made on applications are based on proof of work or proof of stake, even if they are fundamental decisions on what product an undertaking should provide. It is possible that an application – based on the voting – decides to change its product (or service) which in return would lead to it not being part of said relevant market anymore. However, it is not necessary to exclude any application from the very beginning.

III. Market power

The way of determining market power has been discussed and questioned in the past. Because the calculation of market power is difficult, competition authorities usually use a two-step method. First, the relevant market is defined, then the potentially dominant position is determined comparing all undertakings of that market.^[78]See EGC, Judgment of 6 July 2000, Case T-62/98, ECLI:EU:T:2000:180 – Volkswagen v Commission, marginal no. 230; see also ECJ, Judgement of 14 February 1978, Case 27/76, ECLI:EU:C:1978:22 – United … Continue reading Logically, a narrower market definition tends to have more powerful undertakings.

In traditional markets, the most common method of calculating market power is based on market shares. Market shares are therefore also the starting point for analyzing whether a company is dominant. However, market shares are not as indicative on the blockchain because of their special architecture and may not be used as a proxy. Especially when considering the first layer, market shares are not a useful tool of comparison because of the differences in the value of the concerned cryptocurrency of each blockchain.^[79]Similarly, Schrepel, Blockchain + Antitrust, 187.

1. Existing methods

As mentioned above, the market share is an important factor when ascertaining market power.^[80]See section C.II.2. Current state of market definition. In the context of blockchain, it is not clear how an authority would calculate market shares. Several approaches seem to have emerged in the past which need further clarification.

One method examines market power based on the consensus mechanisms.^[81]See section B.V.3. for the consensus mechanisms. Hoffer/Mirtchev suggest two different ways of identifying market power.^[82]Hoffer/Mirtchev, NZKart 2019, 244. According to their first method, market power on a blockchain based on proof of stake^[83]For a detailed description of proof of stake, see B.V.III.b). could be measured by the ownership of the issued tokens, especially if one or several users have a high volume of ownership in view of the issued tokens.^[84]Hoffer/Mirtchev, NZKart 2019, 244. While this approach is able to determine who has a say in said blockchain ecosystems, it does not reveal anything on market power. This fact is rather comparable to majority shareholders in a company acting in a “traditional” market. When determining whether a company has market power (and is abusing that power), competition authorities do not need to know whether someone has a majority stake in the company or not.

As specified above, the indirect method of calculating market power determines the market power of different undertakings in one defined market. Hoffer’s and Mirtchev’s method, however, does not consider different undertakings in a defined market, but only examines the internal matters within a blockchain infrastructure (or application) which is of no interest for competition law.

According to these authors, the other way of establishing the domination of a relevant market is by evaluating the hashing power in a proof of work.^[85]For a detailed description of proof of work, see B.V.III.a). As they state correctly, there is a hypothetical chance of controlling a blockchain when a group of miners can control more than 50% of the hashing power. Consequently, miners would be able to control the consensus on a network. From that, they deduce market power through these miners.^[86]Hoffer/Mirtchev, NZKart 2019, 244; further details on the 51% attack, see Weber, DLT-Handelsplattformen, 88. However, this again does not establish any market power and just describes the cir­cum­stances within a blockchain infrastructure as it just concerns the internal matters of an undertaking (i.e., control of an undertaking). This method does not allow to compare any two undertakings for antitrust proceedings.

Therefore, these existing methods are impractical and do not grant any reliable insight on market power or dominant position of an undertaking in a defined market. Hence, it is necessary to provide an appropriate proxy or approach for calculating market power on the blockchain.

2. Alternative approach for the determination of market power on the blockchain

Because the market share cannot be used as a proxy when determining market power on the blockchain, another approach is necessary. One possible solution would be to establish market power through the number of participating nodes. As mentioned, blockchains consist of different nodes forming the distributed network.^[87]See sections B.I. Terminology, B.II. Fundamental objectives of blockchain, and B.V.2. Decentralized structure without intermediaries.

One challenge of this method consists in the control over the nodes because in public/permissionless blockchains everybody is allowed to “connect” to the blockchain, i.e., to create an own node. In consequence, this situation allows to have “unused” nodes on the application. Therefore, plainly determining market power by the existing nodes does not provide satisfying results. While using nodes as a proxy for market power might have some advantages, authorities need to further investigate the exact behavior of these nodes, i.e., investigate their activity on the application (passive users generally do not provide any added value to the system). The activity of the nodes can be determined by different factors such as participation on consensus-building, participation on the blockchain, conducting transactions or even search queries where applicable.^[88]Similarly, Schrepel, Blockchain + Antitrust, 190; Lianos, Blockchain Competition, 86.

Another interesting way of deducing the activity on a blockchain is by analyzing the hashing power spent for any one validation of a block. The faster a community is able to validate a block (thus the more hashing power they spend) the more active this community is. Hence, this blockchain (or application) usually also is more attractive than other competing blockchains (or applications).^[89]Lianos, Blockchain Competition, 86.

Again, another way of calculating market power on a blockchain might be to rely on the number of transactions recorded on a blockchain (or application). This, however, may lead to inaccurate results because just a high number of transactions does not equal to high market power. This method needs to be combined with the volume of transactions conducted on said blockchain. Because the blockchain is regarded as the internet of values, the number of transactions combined with the volume of those transactions may provide valuable insight on market power. When considering the volume of a transaction, further problems may arise, especially the high fluctuation of the value of tokens^[90]A token in the context of distributed ledgers is considered a digital representation of a good and can be traded like assets that are part of the underlying protocol. on the blockchain.^[91]See also Schrepel, Blockchain + Antitrust, 189. There are, however, possibilities to circumvent this problem. Even though Schrepel also brings up the problem of high fluctuation, he disregards the fact that, when analyzing different blockchain structures, authorities do not necessarily need to convert the value of a token to fiat money. It is easily possible to calculate the value of tokens on the blockchain based on an “anchor token”. Then, there is a lot less fluctuation of the tokens under investigation and the analysis is kept in the blockchain environment without outside world influences.

Due to the fact that transactions are of great importance on the blockchain the generated revenue on the blockchain or the applications may also be one of many indicators on its market power.

In contrast to the already existing ways of determining market power on the blockchain, this method comprehensively captures the (economic) activity on a blockchain and not the internal organization of it. In addition, the activity of the nodes can compare different applications regardless of whether the investigated undertakings are based on a public/permissionless or private/permissioned blockchains.

D. Outlook

As two core elements of antitrust proceedings, market definition and market power have always been an object of competition law literature. This most probably will not change with the challenges of the blockchain developments. Even though this topic is still to be fully explored by informatics, business, law, and other scholars, it seems to be important to take first actions where possible.

Similar to the developments in the context of the regulation of financial markets, it remains to be seen what importance blockchain architecture will have for authorities. There has not been any antitrust case concerning the blockchain so far. Nonetheless, first discussions on this topic seem to show that a correct application of the already known (and with the digital developments expanded methods) usually appear to be able to seize the challenges faced with blockchain.

In view of market definition, this article suggests distinguishing between each layer of the blockchain architecture. The base layer is comparable to the infrastructure layer of the internet. As for the internet, the infrastructure layer usually is not part of antitrust proceedings. Authorities are more concerned with what happens on this infrastructure. Similarly, in the context of blockchain, authorities will most probably deal with applications that are created on said infrastructure. It is imperative that competition authorities do not differentiate from the very beginning between markets based on the blockchain network itself and markets based on the type of blockchain (public/permissionless or private/permissioned). When looking at the application layer, a market for the application as a whole can be constituted by applying the concept demand side substitutability. Furthermore, it is possible to define a market based on the SSNIP test as every application conducts a transaction. Such a transaction is coupled with a fee, be it at a percentage rate or a fixed amount, which can serve as the price that needs to be increased.

In the past, it has been suggested that market power may be calculated through ownership in tokens on a proof of work or control of more than 50% on a proof of stake system. Both methods, however, do not provide sufficient knowledge on market power, but only on internal control of an undertaking which is of no relevance for competition law. Therefore, this article suggests determining market power through the activity of nodes in any blockchain network or application. The activity of nodes is a valuable indicator on active usage of the network or application.

As shown, there is no need to adapt the antitrust laws themselves because selectively adapting the approach to market definition and calculation of market power seems sufficient. This would also be in line with the desirability of making regulations technologically neutral when regulating DLT and blockchain law.

This article has not touched on various other problems regarding competition law in the blockchain environment which need further investigation. Once market definition and market power are established, authorities have to look at anti-competitive practices by undertakings. But in the context of blockchain, it is important to first acquire insights on what layer of the blockchain is of interest and on what exactly constitutes the undertaking (or on what this undertaking consists of). The theory of granularity lays the ground for that analysis.