Vitalik Buterin delivers a special presentation for the first time in London at the Ethereum meetups. Video: http://youtu.be/S47iWiKKvLA Q&A: http://youtu.be/qM8zkzFZVok For more meetups: http://www.meetup.com/ethereum To learn more about ethereum: https://forum.ethereum.org
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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
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