Tuesday, February 28, 2023

The Center For Gaslighting About Blockchains

On March 10th 2022, as Bitcoin recorded a 43% loss from its peak the previous November, and 8 weeks before Terra/Luna crashed, driving the loss to 76%, Princeton launched the Center for the Decentralization of Power Through Blockchain Technology.

A year later I am laughing as I read Francesca Maglione’s Princeton Says Crypto Chaos Helps Justify Its Blockchain Center describing their desperate attempts to spin this as a good move. Below the fold I pour scorn on this outbreak of "blockchain is the answer, now what was the question?".

Tuesday, February 14, 2023

Sybil Defense

Calling a system "decentralized" because its architecture looks decentralized causes two serious problems:
  • It ignores the fact that decentralization isn't binary, it is a spectrum. Systems claiming decentralization can be characterized by their "Nakamoto coefficient":
    The number of entities sufficient to disrupt a blockchain is relatively low: four for Bitcoin, two for Ethereum, and less than a dozen for most PoS networks.
    This number varies through time, but for both is almost always between two and five, which is not very "decentralized". Given that the "entities" in question are known to coordinate their behavior off-chain, this number doesn't tell you anything useful about the system.
  • What calling a system "decentralized" even though it actually isn't does usefully do is to inhibit regulation. It creates the false impression that responsibility for the state and actions of the system is so diffuse that regulators lack a viable traget.
Because a system's Nakamoto coefficient is variable, somewhat difficult to measure and likely to be an over-estimate, the claim that a system is "decentralized" is always subjective.

There is a much more useful, completely objective criterion. Participation in a system either is, or is not subject to permission from some authority, and this can be confirmed by the experiment of trying to participate without asking permission.

Permissionless systems can claim some advantages, but they suffer from some serious disadvantages. Chief among them is the need to defend against "Sybil attacks". Below the fold I discuss Sybil attacks, the defense against them, and the implications for the systems that adopt this defense.

Tuesday, February 7, 2023

Economic Incentives

Economic incentives are the glue holding the cryptosphere together. The security of Proof-of-Work blockchains depends upon the cost in hardware and power of an attack being more than the attack could gain. The security of Proof-of-Stake blockchains depends upon an attack reducing the value of the stake. There are economic incentives for market manipulation, pump-and-dump schemes, rug pulls, front-running and many other market behaviors. These are all very effective, but in this post I look at what appears to be a glaring exception to their effectiveness.

Permissionless systems are less efficient, slower, and vastly more expensive to set up and operate than permissioned systems performing exactly the same task. One would think that the permissioned systems would out-compete them, but in the cryptosphere they don't. Below the fold I attempt to answer the following obvious questions:
  • Why are permissionless systems more expensive?
  • How large is the investment in avoiding the need for permission?
  • Where does the return on this investment come from?
  • How large is the return on this investment?
The answers to these questions show that Prof. Angela Walch is correct when she writes:
the common meaning of ‘decentralized’ as applied to blockchain systems functions as a veil that covers over and prevents many from seeing the actions of key actors within the system.