On Bitcoin and Red Balloons (1111.2626v2)

Abstract: Many large decentralized systems rely on information propagation to ensure their proper function. We examine a common scenario in which only participants that are aware of the information can compete for some reward, and thus informed participants have an incentive not to propagate information to others. One recent example in which such tension arises is the 2009 DARPA Network Challenge (finding red balloons). We focus on another prominent example: Bitcoin, a decentralized electronic currency system. Bitcoin represents a radical new approach to monetary systems. It has been getting a large amount of public attention over the last year, both in policy discussions and in the popular press. Its cryptographic fundamentals have largely held up even as its usage has become increasingly widespread. We find, however, that it exhibits a fundamental problem of a different nature, based on how its incentives are structured. We propose a modification to the protocol that can eliminate this problem. Bitcoin relies on a peer-to-peer network to track transactions that are performed with the currency. For this purpose, every transaction a node learns about should be transmitted to its neighbors in the network. The current implemented protocol provides an incentive to nodes to not broadcast transactions they are aware of. Our solution is to augment the protocol with a scheme that rewards information propagation. Since clones are easy to create in the Bitcoin system, an important feature of our scheme is Sybil-proofness. We show that our proposed scheme succeeds in setting the correct incentives, that it is Sybil-proof, and that it requires only a small payment overhead, all this is achieved with iterated elimination of dominated strategies. We complement this result by showing that there are no reward schemes in which information propagation and no self-cloning is a dominant strategy.

• The paper introduces a novel reward scheme to counteract incentive misalignment in decentralized networks.
• It proposes a Sybil-proof mechanism using iterated elimination of dominated strategies to enhance Bitcoin’s performance.
• The research highlights practical strategies for aligning individual incentives with overall system efficiency in decentralized platforms.

Analysis of "On Bitcoin and Red Balloons"

The paper "On Bitcoin and Red Balloons" by Moshe Babaioff, Shahar Dobzinski, Sigal Oren, and Aviv Zohar explores incentive structures in decentralized systems, using Bitcoin and the DARPA Network Challenge as case studies. The authors focus on the challenge of information propagation in large decentralized networks and how current reward systems can misalign incentives, leading to suboptimal system performance. Their solution involves introducing Sybil-proof mechanisms to enhance information dissemination in Bitcoin's protocol.

Problem Definition

A core problem identified in the paper is the incentive misalignment that discourages participants from sharing information in systems where only informed participants can compete for rewards. This dilemma was evident in the 2009 DARPA Network Challenge, where participants were incentivized not only to find the physical locations of red weather balloons but also to share the information through a clever tiered reward structure. At its essence, the tension arises because each additional informed participant increases competition, which can reduce the probability of any single participant winning the reward.

Bitcoin, a decentralized currency system proposed by Satoshi Nakamoto, presents a similar issue. The protocol relies on a peer-to-peer network where transactions are verified and authorized by nodes. The paper highlights a fundamental problem: nodes are incentivized to withhold transaction propagation to maximize their chances of earning transaction fees. If a node alone knows of a transaction, it encounters no competition in authorizing it, a strategy leading to slower transaction times and network inefficiencies. This inefficiency can become detrimental as the system matures and transaction fees replace the current reward mechanism of newly minted bitcoins.

Methodology

The paper proposes a modified Bitcoin protocol that encourages information propagation while ensuring Sybil-proofness. The authors introduce a reward scheme that leverages a concept of iterated elimination of dominated strategies. The proposed mechanism incentivizes nodes to propagate information instead of hoarding it, overcoming the fundamental tension identified.

The proposed solution involves strategic propagation incentives tailored through an almost-uniform scheme, which distributes rewards along a propagation tree. The paper meticulously constructs conditions under which these reward schemes ensure proper information dissemination. The mechanism design is crafted such that the deletion of dominated strategies systematically leaves only those strategies incentivizing propagation without Sybil attacks.

The reward scheme can involve a combination of parameters such as the depth of propagation and the magnitude of reward. Notably, the reward schemes tested include settings where the rewards are dependent on the number of nodes informed, thus promoting wider dissemination of transaction information.

Results and Implications

The authors rigorously prove that these tailored incentive schemes encourage full information propagation while remaining Sybil-proof. While dominant strategy incentive compatibility is not achievable—no set of rewards exists where information propagation and no duplication are dominant strategies for all nodes with respect to Sybil attacks—the paper's approach holds firm under the iterated elimination of dominated strategies.

Practically, this incentivization structure has significant implications for decentralized networks. By aligning participants' incentives with the system's overall health, the proposed modification enhances transaction speeds and reliability in Bitcoin's network. Theoretically, the work introduces a novel approach to tackling similar issues of incentive alignment in other decentralized systems, presenting a framework that balances the complex interplay of individual incentives and system-wide efficiencies.

Future Directions

The paper suggests avenues for further research, such as adapting these incentivization protocols to various network structures or examining different processing power distributions among nodes. Exploring empirical evaluations of these schemes within real-world Bitcoin transactions could substantiate the theoretical findings and pave the way for widespread adoption.

In conclusion, this research offers a comprehensive solution to a persistent problem in decentralized systems, providing insights that could be valuable beyond the specific case of Bitcoin. As the field evolves, continued exploration of mechanism design in decentralized systems promises to yield impactful developments in the understanding and enhancement of system dynamics.