CRYPTOECONOMICS

DESIGN FOR THE DECENTRALISED WORLD Lisbon 08/2018

 

INCENTIVE STRUCTURES TRANSFORM SOCIETY.

WHO AM I

2010 MASTER IN ECONOMIC SCIENCE - STATISTICS

2015  DISCOVERED THE WORLD COMPUTER IDEA - ETHEREUM

2016  CONNECTING WITH LIKEWISE MINDS - COMMUNITY ETHEREUMMADRID

2017  SPREADING THE IDEA - TEACHING CONCEPTS (BITCOIN & ETHEREUM)

2018  COLLECTIVE RESEARCH - CRYPTOECONOMICS.HUB WITH LAURENT

INTRO

S01

Vlad Zamfir, Ethereum Foundation 2015

S01

 

CRYPTOECONOMICS

S01

 

IS A FUNCTION OF ALREADY EXISTING INFORMATION.

S01

 

TOKEN & PREVILIGES

S01

CRYPTO ELEMENTS

S02

CRYPTO GRAPHY

S02

HOW TO PROOVE IDENTITY

 

HOW TO PROOVE CORRECTNESS

 

HOW TO PROOVE TIME HAS PASSED

 

GAME THEORY

S02

JOHN NASH

MATHEMATICIAN

1928-2015

 

S02

Cooperate Defect
Cooperate  1,1 -1,2
Defect 2,-1 0,0

You

Your game partner

S02

Boxing  Cooking
Boxing 1,2 0,0
Cooking 0,0 2,1

Cooking lover

Boxing lover

S02

Hawk  Dove
Hawk (50-100)*0.5 = -25 50
Dove 0 (0.5*50)-10=15

Attacker

Opponent

V= 50     D= -100     T= -10

S02

MECHANISM DESIGN

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AUCTION DESIGN

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AUCTION + STAKING

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BEHAVIOURAL ECONOMICS

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ULTIMATUM GAME

You get 100€
​You have to offer something to your partner
If your partner accepts you get the remaining part
If your partner reject both get nothing

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SURPRISINGLY POPULAR

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Ultimatum Game

NETWORK SCIENCE

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METCLAFE'S LAW

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PROBLEMS OF OVER-CONNECTON

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HIGH SPEED CONTAGION

 

 

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NO INNOVATION

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RESEARCH GROUPS

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S03

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CONSENSUS PROTOCOLS

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The purpose of a consensus algorithm, in general,

is to allow for the secure updating of a state according to some specific state transition rules,

where the right to perform the state transitions

is distributed among some economic set.

VITALIK, 2014

S04

HOW CAN WE ACHIEVE CONSENSUS?

 

S04

LET'S PLAY A GAME...

 

14237 59049 76241 81259 90215 100000 132156 157604

14237 59049 76241 81259 90215 100000 132156 157604

THOMAS SCHELLING

GAME THEORY ECONOMIST

1921-2016

 

S04

ONCHAIN APP'S NEED TO KNOW THE OFF-CHAIN TRUTH.

 

S04

Oracles - central point of failure and control

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Oracles decentralised

S04

Schelling Coin is a mechanism based on the game, that if you choose the answer, which everyone else has chosen, you get a Schelling.

 

S04

Who won the election?

 

 

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Choose Hillary or Trump

 

If you choose

what the majority says

you get a Schelling.

 

 

S04

Hillary

Trump

Hillary 

Schelling

0

Trump

0

Schelling

Majority

You

S04

Trump as being the truth

is the Schelling Point.

 

 

S04

S04

Centralisation

 

 

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Energy Waste

 

 

S04

S04

1. Randomly choose a validator based on the proportional stake invested from the group of already existing validators.
2. The chosen validator creates a block which points to some previously created block.
3. The chosen validator gets the block reward and the transaction fees.

BF based

 

 

S04

1. Randomly choose a validator based on the proportional stake
invested from the group of already existing validators.
2. The chosen validator proposes a block
3. All the other validators vote yes if they think it is a valid block
4. If ⅔ or more voting power votes yes, the block is included in the blockchain. Otherwise a new proposer is chosen and we go to 1.
5. The chosen validator gets the block reward and the transaction fees

Chain based

 

 

S04

Rich get Richer

 

 

S04

Low participation

can cause centralisation

 

 

S04

GAME ATTACKS

S05

SAME GAME

NEW RULES

S05

Choose Hillary or Trump

If you choose what the majority says you get a Schelling.

If you choose Hillary, but the majority chooses Trump you'll get the bribe.

S05

Hillary

Trump

Hillary 

Schelling

Attacker 

Trump

0

Schelling

Majority

You

S05

If you choose Hillary

you win in any case.

S05

Costs = 0

Budget = ?

 

 

S05

S05

Crucial to the success of any PoW attack

is the amount of hashing power.

S05

 

 

Carlos wants to buy an iPhone from Carla for 1 BTC, but he actually does not want to spend this money and tries a double spend attack.

 

 

S05

 

 

What should Carla do to protect herself from a double spend attack?

 

S05

 

 

Carla should wait for

a certain amount of confirmations.  

 

S05

 

 

Carla defines 2 transactions are needed

before she sends the iphone.

 

 

S05

 

 

Carlos creates a secret chain including a new transaction which is going to transfer the money back to him.

 

S05

Transaction: Carlos to Carla 1BTC

1 confirmation 

2 confirmations 

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Transaction: Carlos to Carla 1BTC

1 confirmation 

2 confirmations 

Transaction: Carlos to Carla 1BTC

S05

 

 

What are the reasons for doing such an attack?

 

S05

 

 

One double spend, which only you can do.

How high can this be?

 

S05

 

 

Destroying Bitcoin so that the confidence in the currency hence its value will drop massively.

Competitor in crypto or fiat (government)

 

S05

 

 

To go short on Bitcoin.

 

 

S05

 

 

What are the risks of an attack?

 

S05

 

 

In the case of no attack:

You can effectively get 100% of the mining reward.

 

S05

 

 

What is more beneficial to do an attack

or to play by the rules?

 

S05

The reason for doing a censorship attack in blockchains is similar to those in any other system, to exclude certain people/entities as well as blackmailing.

S05

We want to censor any transaction from Alex.

 

 

S05

1. Strategy

Tell the network to not include the transaction from Alex.

 

 

S05

2. Strategy

We have 51% hashing power - we can do a punitive forking.

 

 

S05

3. Strategy

If we have less than 51% we can do  

Feather Forking.

 

 

S05

Let q equal the proportion of mining power you have, 0 < q < 1

Let k = 1: You will give up after 1 confirmation (one additional block)

Chance of successfully orphaning (invalidating) the block = q2

If q = 20%, then q2 = 4% chance of orphaning block.

 

S05

Now you are a miner and

you have these 2 options:

 

 

 

S05

 

1. EV(include) = (1 - q2) * BlockReward + Alex's tx fee

2. EV(don't include) = BlockReward

 

 

S05

 

Unless Alex pays q2 * the BlockReward in fees for his transaction, other miners will mine on the malicious chain

4% * 12.5 BTC = 0.5 BTC

 

 

S05

S05

Crucial to the success of a PoS attack

 is the amount of voting power.

S05

How would this look like in PoW?

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STATE CHANNELS

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TOKEN MODELS

S07

TOKEN SALES

S07

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STABLE COINS

S07

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TOKEN CURATED REGISTERIES

S07

Vlad Zamfir, Ethereum Foundation

BLOCKCHAIN ARE NOT TOYS.

THEY AREN'T GET RICH QUICK SCHEMES.

THEY AREN'T A SHONY TOOL FOR AUTOMATING YOUR BUSINESS PROCESS.

THEY ARE POWERFUL TECHNOLOGY THAT HAVE THE POTENTIAL TO DO UNSPEAKABLE HARM.

BUT THEY CAN ALSO PROVIDE THE BASIS FOR SOLUTIONS TO SERIOUS GLOBAL PROBLEMS.