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. Prisoners 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 prisoners 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: whats 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 dont: +0.99 others, +0 you Others reform, you dont: +1.99 others, +0 you

8. Revolution No one participates: +1 all Everyone participates: +2 all (yay democracy) You participate, others dont: -100 you, +0.99 others Others participate, you dont: +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 owners 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: its 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) its 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 FBIs 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