The Cryptoeconomic Way

What is cryptoeconomics?

History of Decentralized Networks Chaumian e-cash (centralized but trust-minimizing): 1982 Napster -> BitTorrent Torrents in “enterprise” (eg. World of Warcraft) P2P cash (1990s, 2000s) Bitcoin (2009) ……

Cryptoeconomics is about... Using cryptography and economic incentives to achieve information security goals Cryptography can prove properties about messages that happened in the past Economic incentives defined inside a system can encourage desired properties to hold into the future Decentralization adds fault tolerance and security

Simple blockchain: Desired properties Create a chain of blocks Include transactions in each block Maintain a “state” Bitcoin: how much money does everyone have? Ethereum: code and state of programs running on the blockchain Transactions should update the state in a valid way

Simple blockchain: Desired properties

Goal: use economic incentives to reward participants who further the system’s objectives, and penalize participants who harm the system’s objectives.

Tools in the toolbox Cryptography Signatures Hashes (incl. PoW) Spooky advanced stuff (ZKPs, timelock, etc) Economic incentives Rewards/penalties Privileges

Why the cryptoeconomic way?

Why the cryptoeconomic way? “Zero infrastructure” - your users are the infrastructure Lower barriers to entry Low social cost of bootstrapping Easy to convince people to trust it High security and reliability (fault tolerance) Difficult to attack Global; independent of national borders Open; anyone can participate

Applications of cryptoeconomics Consensus layer Proof of work Proof of stake Second layer Smart contract mechanisms Gadgets (mechanisms that get used by other mechanisms) Channel constructions (lightning, Raiden, Truebit, etc)

Note on public vs consortium chains The cryptoeconomic approach is more useful in public chain applications, as in restricted-identity applications there are often legal/social ways of penalizing bad actors However, there are sometimes parallels “Fault accountability” in consensus

Why Ethereum?

Why Ethereum? Seeming public consensus circa 2013: blockchains are useful for… stuff Not just money! Asset issuance, crowdfunding, domain registration, title registration, gambling, prediction markets, internet of things, voting, hundreds of applications!

Problem: most existing blockchain protocols were designed like this:

Or, at best, like this:

So… why not make a protocol that works like this?

DNS: The “Hello World” of Ethereum domains: {owner: address, ip: num}[bytes32] def register(addr: bytes32): if not self.domains[addr].owner: self.domains[addr].owner = msg.sender def set_ip(addr: bytes32, ip: num): if self.domains[addr].owner == msg.sender: self.domains[addr].ip = ip

Smart contracts

What is this good for?

Users Financial applications Payments Trading Insurance (including P2P mutual insurance, etc) Non-financial Product authentication Identity management

Users Semi-financial Decentralized markets for computation, storage, etc Use cryptoeconomic commitments in various web applications