### Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society

1. Nothing New under the Sun Exploring the parallels between Cryptocurrency and Society
2. Introduction ● We often like to say Bitcoin is a fundamentally new economic paradigm ● Common theory: ○ Commodity money ○ Commodity-backed money ○ Fiat money ○ Cryptocurrency (obviously) ● Self-executing contracts, DACs, Skynet ● Reality: everything here has existed before
3. Prisoner’s Dilemma and Nash Equilibria ● Everyone has two moves: cooperate or defect (left, top) C D C 5, 5 0, 7 D 7, 0 2, 2 ● Generalized prisoner’s dilemma: ○ N players ○ Can cooperate (+1, +1) or cheat (+2, -5) ● Nash equilibrium: everyone defects
4. Punishment ● Idea: spend effort to to punish defectors (-0.5, -5) (left, top) C D C 5, 5 0, 2 D 2, 0 -3, -3 ● Seems wasteful, but changes the incentives ● Problem: what’s the incentive to punish ● Solution: non-punishment is punishable ● Tax-funded police, social ostracism
5. Schelling Points ● Two prisoners in separate rooms both see: 59049 71245 80764 92145 97621 100000 123875 161924 ● If prisoners give same number, they go free, otherwise they die
6. Hawk/Dove Game ● Everyone has two moves: attack or retreat ● Equilibria: ○ A attacks, B retreats ○ B attacks, A retreats ● Bourgeois equilibrium: A/R based on tag ○ Property rights (left, top) A R A 0, 0 6, 2 R 2, 6 4, 4
7. Coordination problems ● How to get from (A, A) to (B,B)? ● Example: spelling reform (left, top) A B A 2, 2 0, 0 B 0, 0 4, 4 ● Everyone spells English words weirdly (“cough”, “enough”, “freight”, “height”): +1 all ● Reformed spelling (“coff”, “enuff”, “frate”, “hite”): +2 all (eezier tu lurn, mor efishent) ● You reform, others don’t: +0.99 others, +0 you ● Others reform, you don’t: +1.99 others, +0 you
8. Revolution ● No one participates: +1 all ● Everyone participates: +2 all (yay democracy) ● You participate, others don’t: -100 you, +0.99 others ● Others participate, you don’t: +1.5 you, 1.99 others (you have lower status in new society)
9. Revolution 2: Hamlet Edition ● Norm exists against killing the king and usurping the throne ● If the current king is killed, the norm disappears, so everyone will repeatedly try to take power ● Fearing this, no one kills the king ● Grim trigger equilibrium
10. Bounded rationality ● People have a bias toward selecting a relatively simple strategy and consistently following it ● Heuristics (eg. guy in suit == this guy got business skillz bro) ● David Friedman on virtue: ○ http://www.daviddfriedman.com/Libertarian/Virtue1.html
11. Stones of Rai ● Small tribe on the island of Yap, ~1900 ● Rai Stones used as money ● Stones never moved, ownership changed via collective agreement ● Ownership very secure ○ Stone at bottom of ocean ○ German invasion
12. Markets as a Punishment System ● Cooperative strategy: act as if dollar is worth X ● Defection 1: undervalue dollar ○ Result: you work too hard and enjoy less products and services ● Defection 2: overvalue dollar ○ Result: you exhaust money before exploring all opportunities ● Both consequences occur because people value a dollar at X
13. Reputation ● Doing certain things increases your reputation ● Incentive: trust reputable people more ○ Predictable pattern of honest behavior ○ They have “more to lose” ● Incentive: be more reputable so people trust you more ● Incentives work with any set of rules
14. Courts ● Hierarchical system of increasing attention ● Normally: go about your business ○ Low attention ● In case of a dispute: go to court ○ Medium attention ● Contested dispute: go to higher and eventually Supreme Court ○ High attention
15. Courts 2 ● Problem: how to obtain estimate of community norms ● Solution: pick 12 random people to adjudicate
16. Courts 3 ● Incentive to deter crime proportional to ● Problem: if crime ~= 0, ~= 0, so no one would bother catching criminals ● Result: sorry, no crime-free utopia for you
17. Blockchains ● Idea: a blockchain is a distributed database with: ○ a state ○ a meaning assigned to the state ○ a state transition rule ■ APPLY(S, TX) -> S' or INVALID
18. Blockchains ● Bitcoin: ○ S = { acct : balance, … } ○ Meaning: balance represents currency units ○ APPLY = { if S[tx.sender] >= tx.val: S’[tx.sender] = S[tx.sender] - tx.val S’[tx.to] = S[tx.to] + tx.val }
19. Blockchains ● Namecoin ○ S = { domain: owner … } ○ Meaning = look up website names here ○ APPLY = { if !S[tx.value]: S[tx.value] = tx.sender } ● Land registry ○ S = { (lat, long): owner … } ○ Meaning = if someone does something at (lat, long) without owner’s permission, whack them ○ APPLY = ?
20. Blockchains ● A blockchain is a series of blocks, each block containing a hash of the previous ● Scoring function ○ score(genesis) = 0 ○ score(block) = score(block.parent) + PoWdiff(block) ○ current state = block with highest score
21. Mining ● Miners spend computational effort producing blocks, get rewarded 25 btc/block ● Miners have 4 ways to deviate: Include an invalid TX giving themselves extra BTC Not bother with PoW Mine on top of an invalid block that favors them Mine on top of a suboptimally scoring block ● Question: why act honestly?
22. Mining as Recursive Punishment ● Idea: if you create an invalid block, other miners will not mine on it, because a block dependent on an invalid block is an invalid block, and miners do not want to produce invalid blocks ● Similar logic for low-scoring blocks
23. Valuation Equilibria ● Question: why do users pay attention to the top-scoring chain? ● Answer 1: it’s a Schelling point ● Answer 2: it is more difficult to attack than the top chain along any other metric
24. Concept: Smart Contracts ● Regular contract: I agree to give you \$300 if you perform task X ● Smart contract: I put \$300 into a box, which are automatically assigned to you if you do X ● Verifiability ○ Pure math (eg. prove a theorem) ○ Global fact (eg. temperature in San Francisco) ○ Local fact (eg. did you wash my car?)
25. Factum Law ● Decentralised consensus lets us create cryptographic systems that control internal assets with emergent value ● This provides a door from the world of cryptography into the real world ● Idea: we can enforce rules without needing real-world “enforcement” by using crypto-subsidies
26. Proof of Work: Takeover Attack ● Ethereum contract ○ Any miner can join, sending deposit into contract ○ To avoid losing deposit, miners must regularly send shares to prove their hashpower ○ Before 60% PoW joins, miners can leave at any time ○ At 60% PoW, deposit locked until a 20+ block-deep fork succeeds ● Incentive to join: possible reward, no risk ● Incentive to follow through: deposit
27. Grim Trigger Argument ● Fails if miners are fungible, works if miners are bound ● Specialized ASIC-friendly algo: good ● CPU algo: bad ○ Unless (1) it’s a monopoly chain or (2) grim trigger spreads across chains ● CPU algo + bonding: good ○ Another kind of PoS?
28. Software ● Altruistic actions in Bitcoin protocol prevalent ○ eg. responding to getblock messages ● Not explainable by general altruism ○ eg. core dev horribly underfunded ● Correct model: 2 kinds of agents ○ Software (= heuristics) ○ Users (download and run software, stick to defaults)
29. Software ● Model defaults as friction: ○ ○ ● “One currency to rule them all” may be flawed ○ | f | > benefit of liquidity
30. Why not delete the FBI’s Silk Road wallet? ● Argument 1: grim trigger equilibrium ● Argument 2: new valuation equilibrium more “complex” to calculate ● Idea: a consensus system is a way of creating a complex valuation equilibrium, and protecting it with: ○ Coordination problem ○ Grim trigger equilibrium ○ Bounded rationality
31. Scalability ● Problem: at 1000000 tx/sec no node can process every transaction ● Solution: split into consensus groups ● Problem: if split into N groups, attacker can take over with 1/N power/stake ● Solution: if substantial disagreement detected, suddenly increase attention
32. Scalability ● Solution 2: randomly select consensus groups per transaction ● General problem: who waves the flashlight? ○ Subsidize via penalty ○ Privatize (ie. potential victims look out for themselves) ● Problem: failure rate ends up nonzero ○ Dependency on altruism
33. Scalability ● Solution 2: randomly select consensus groups per transaction ● General problem: who waves the flashlight? ○ Subsidize via penalty ○ Privatize (ie. potential victims look out for themselves) ● Problem: failure rate ends up nonzero ○ Dependency on altruism
34. Conclusion ● Cryptoeconomic protocols are social protocols ● Everything has already done before ● The main benefits we have are: ○ Opportunity for computationally complex equilibria ○ Low-cost communication