Vitalik Buterin (Ethereum Co-founder) – Cryptoeconomics in 30 Minutes (Dec 2019)

Chapters

Abstract

Harnessing the Power of Crypto-Economics: A Revolutionary Leap in Blockchain Technology

Unlocking the Potential of Decentralized Systems

The field of blockchain technology has witnessed a paradigm shift with the integration of crypto-economics, an ingenious meld of economic incentives and cryptographic assurance. This article delves into the core concepts and advancements in crypto-economics, underscoring their pivotal role in the evolution and security of blockchain systems like Ethereum. From the groundbreaking Byzantine Generals Problem solution to the innovative scaling techniques of zk-SNARKs and Optimistic Rollups, we explore how these technologies are reshaping the landscape of decentralized systems.

Molesoy-Lamport’s Algorithm: A Foundation for Trustworthy Digital Cooperation

In 1982, the Byzantine Generals Problem was addressed by Molesoy-Lamport’s algorithms, a critical milestone that enabled digital cooperation even amidst malicious entities and asynchronous networks. This breakthrough laid the groundwork for blockchain protocols, where trust and agreement are paramount.

Molesoy-Lamport’s Discovery:

Contradicting common knowledge, Molesoy-Lamport solved the Byzantine Generals Problem in 1982. His paper presented algorithms for parties to agree on data, even with up to one-third of them being malicious and without assumptions about network synchrony.

Satoshi’s Revolutionary Vision: Beyond Cryptography

Satoshi Nakamoto, the enigmatic figure behind Bitcoin, introduced more than just a cryptocurrency. His true invention lies in the domain of crypto-economics, where economic incentives are cleverly intertwined with cryptographic security. This blend extends the reach of cryptography, making it a robust tool for ensuring network integrity beyond mere computational limits.

Satoshi’s Invention: Crypto-economics:

Despite prior solutions to decentralized consensus, Satoshi’s true contribution was crypto-economics. Crypto-economics utilizes economic incentives to provide guarantees in applications. It combines economic incentives and game theoretic reasoning with cryptographic reasoning. While cryptographic reasoning relies on assumptions about the adversary’s computing power, crypto-economics offers guarantees beyond cryptography’s capabilities.

Proof-of-Stake: Reinforcing Blockchain Integrity

Proof-of-Stake (PoS) finalization, exemplified by the CasperFFG algorithm, epitomizes the application of crypto-economics in blockchain security. In PoS systems, validators play a crucial role in block finalization, requiring a two-thirds majority to vote for a block, thereby eliminating contradictory validations and fortifying the network’s security.

Uniquely Attributable and Not-Uniquely Attributable Faults:

Vitalik Buterin differentiates between uniquely attributable and not-uniquely attributable faults in crypto-economics. Not-uniquely attributable faults are mistakes where it’s known that something went wrong, but it’s unclear who is responsible. Uniquely attributable faults are mistakes where it can be proven that a specific actor is responsible.

Penalizing Faults:

Not-uniquely attributable faults can only be penalized to a limited extent to avoid punishing innocent participants and discouraging participation in the system. Uniquely attributable faults can be penalized more severely because the responsible actor can be identified and punished directly.

Proof-of-Stake and Finality:

In proof-of-stake, validators are required to make deposits to participate. These deposits are locked up so that in-protocol penalties can be applied if validators commit uniquely attributable faults. This mechanism leads to a higher cost of attacking a proof-of-stake system compared to a proof-of-work system. Finality in proof-of-stake is achieved when validators create a series of messages supporting a block.

The Economic Engine Driving Blockchain Behavior

At the heart of blockchain systems lies crypto-economics, steering participant behavior through economic incentives. Protocols like Proof-of-Stake and Proof-of-Work are prime examples of how economic incentives are employed to maintain network integrity and efficiency.

Cryptoeconomics vs. Cryptography:

– Cryptoeconomics provides economic guarantees, not cryptographic ones.

– Assumptions about platform continuity (liveness) and consensus cannot be guaranteed by cryptography alone.

Scaling Blockchains: Interactive Computation and Optimistic Roll-up

Interactive computation emerges as a scalable solution for blockchains, allowing them to verify complex computations without executing them in their entirety on-chain. This technique breaks down computations into manageable steps, overseen by a smart contract, and incentivizes accuracy through a challenge-and-reward system.

Interactive Computation Overview:

Interactive computation is a scalability primitive that enables blockchains to learn the results of complex computations without executing them entirely on-chain.

Interactive Computation Protocol:

– A smart contract contains a reward and a protocol for submitting a sequence of intermediate values (x1, x2, x3, …) to calculate a final result (y).

– Proposers submit the sequence of values along with a deposit.

– There is a challenge period where anyone can point out incorrect values.

– Challengers receive a reward if they successfully identify an incorrect value.

Interactive Computation Example:

– Calculating 2 to the power of 10 using interactive computation:

– Submit intermediate values (1, 2, 4, 8, …) up to x100.

– Challengers can point out incorrect values during the challenge period.

– If an incorrect value is identified, the submitter’s deposit is destroyed, and the challenger receives a reward.

Interactive Computation and Optimistic Roll-ups:

– Interactive computation is the core of optimistic roll-ups, which allow for scalability by performing computations off-chain by default, unless someone disputes a particular transaction.

Interactive Computation and zk-SNARKs:

– Interactive computation achieves the same result as zk-SNARKs by allowing complex computations to be verified on-chain without executing them entirely on-chain.

Comparing Scalability Solutions: Interactive Computation and zk-SNARKs

While both interactive computation and zk-SNARKs aim to enhance blockchain scalability, they differ in their approaches. Interactive computation relies on economic incentives to ensure computation accuracy, whereas zk-SNARKs employ cryptographic proofs for immediate result validation without a challenge period, albeit with higher computational demands.

ZK-SNARKs vs. Optimistic Computation:

– ZK-SNARKs involve off-chain computation, on-chain proof creation, and proof verification instead of full computation on-chain.

– Interactive computation involves a few parties running the computation off-chain and engaging in a crypto-economic protocol.

– The visibility of this protocol can convince others of the computation’s correctness without running it themselves.

ZK-SNARKs vs. Optimistic Rollups: A Comparative Analysis

ZK-SNARKs offer immediate result verification with high computational overhead, in contrast to Optimistic Rollups, which require a challenge period but are more efficient and simpler to implement.

Efficiency and Implementation:

– SNARKs have high computational overhead, especially for general-purpose virtual machine execution.

– Optimistic computation is more efficient and easier to implement.

Ethereum’s Backbone: Crypto-Economics

Crypto-economics serves as the protective shield for Ethereum, securing everything from its base layer protocols to off-chain messaging. It’s a critical component in defending against DOS attacks and ensuring the reliability of Layer 2 solutions.

Applications of Crypto Economics:

– Crypto economics protects the base layer of Ethereum protocols.

– It secures light clients and Layer 2 games like Plasma, Channels, Optimistic Rollup, and Truebit.

– It enhances the security of off-chain messaging protocols through DOS resistance.

Satoshi’s Enduring Influence

Satoshi Nakamoto’s pioneering work in crypto-economics has indelibly shaped Ethereum’s ecosystem, laying a robust foundation for its development and future innovations.

The Diverse Paths of zk-SNARKs and Optimistic Rollups

In conclusion, both zk-SNARKs and Optimistic Rollups present unique advantages in blockchain scalability and efficiency. Crypto-economics, a field greatly impacted by Satoshi’s vision, continues to play a vital role in enhancing and securing the Ethereum ecosystem, demonstrating the transformative power of combining economic principles with cryptographic security.

Notes by: datagram