Cooperation among an anonymous group protected Bitcoin during failures of decentralization (2206.02871v1)

Abstract: Bitcoin is a digital currency designed to rely on a decentralized, trustless network of anonymous agents. Using a pseudonymous-address-linking procedure that achieves >99% sensitivity and >99% specificity, we reveal that between launch (January 3rd, 2009), and when the price reached $1 (February 9th, 2011), most bitcoin was mined by only sixty-four agents. This was due to the rapid emergence of Pareto distributions in bitcoin income, producing such extensive resource centralization that almost all contemporary bitcoin addresses can be connected to these top agents by a chain of six transactions. Centralization created a social dilemma. Attackers could routinely exploit bitcoin via a "51% attack", making it possible for them to repeatedly spend the same bitcoins. Yet doing so would harm the community. Strikingly, we find that potential attackers always chose to cooperate instead. We model this dilemma using an N-player Centipede game in which anonymous players can choose to exploit, and thereby undermine, an appreciating good. Combining theory and economic experiments, we show that, even when individual payoffs are unchanged, cooperation is more frequent when the game is played by an anonymous group. Although bitcoin was designed to rely on a decentralized, trustless network of anonymous agents, its early success rested instead on cooperation among a small group of altruistic founders.

• The paper reveals that early Bitcoin mining was highly centralized, with only 64 agents producing the majority of Bitcoin between 2009 and 2011.
• Despite the potential for destructive 51% attacks, these leading anonymous agents cooperated to protect the network's value over pursuing short-term gain.
• Modeled using an N-player Centipede game, this cooperative behavior highlights the potential for altruism in anonymous digital collectives but also exposes privacy vulnerabilities arising from centralization.

Analysis of Early Bitcoin Centralization and Cooperative Dynamics

The paper "Cooperation among an anonymous group protected Bitcoin during failures of decentralization" by Blackburn et al. explores the initial phases of Bitcoin's operation, emphasizing the centralization of mining activities and the cooperative dynamics that emerged among the leading agents. The research leverages a pseudonymous-address-linking procedure with high sensitivity and specificity to illustrate the centralization patterns within Bitcoin before it reached value parity with the US Dollar.

Centralization in Early Bitcoin Mining

A key finding of the paper is that, contrary to the decentralized ideology of Bitcoin, its early mining activities were highly centralized. The paper identifies that only 64 agents were responsible for mining most of the Bitcoin produced between January 3, 2009, and February 9, 2011. This small cohort of major players contrasts sharply with previous estimates suggesting a considerably larger active mining community. The concentrations of mining power illustrate a rapid emergence of Pareto distributions, where a minority held the majority of resources—a phenomenon observed in various national economies.

Security Dilemma and the 51% Attack

The centralization in mining capacity presented an existential threat in the form of potential "51% attacks," whereby a single agent controlling more than half of the network's computational power could compromise the blockchain by double-spending. The authors provide both a theoretical framework and empirical observations indicating that such attacks, despite their feasibility, were not executed by these key agents. Instead, anonymity in the ecosystem fostered cooperative behavior to preserve the long-term intrinsic value of Bitcoin over short-term, self-interested exploits.

Modeling Cooperation: N-player Centipede Game

The researchers employ an N-player version of the Centipede game to model the cooperative dynamics among Bitcoin miners. The game theoretically emphasizes the tension between immediate self-gain through defection versus delayed cooperation for long-term communal benefit. Despite the classical Nash equilibrium suggesting defection, experimental findings implied higher cooperation within anonymous groups, where individuals might prioritize collective success and avoid detrimental actions even without guaranteed reciprocal benefits. This behavior indicates a preference for preserving group success, aligning with altruistic decision-making processes.

Implications for Privacy and Network Vulnerability

The centralization story extends to the implications for privacy. The top 64 agents were found to be central nodes in the Bitcoin network, such that the vast majority of addresses could be traced back to these agents within six degrees of separation. This structural property of the Bitcoin network implies significant privacy vulnerabilities. If identities of these key agents were exposed, it could lead to widespread deanonymization of the Bitcoin network's transactional graph, revealing the need for robust privacy-preserving mechanisms.

Discussion

This research raises several pertinent issues regarding the interplay between cryptocurrency design, economic incentives, and human behavior. The dynamics that prevented 51% attacks underscore the potential for altruism in anonymous digital collectives, which is crucial for understanding the stability of distributed trust mechanisms. The findings suggest that the continued appreciation of digital currencies might influence cooperative behavior among participants, echoing broader questions about the sustainability of cooperation if such appreciation stagnates.

Future Directions

Looking forward, the paper hints at the importance of network and consensus protocol designs that account for the potential and pitfalls of centralization and trust in ostensibly trustless environments. Future work could explore how these insights might apply to newer cryptocurrencies or decentralized systems, where initial centralization might provide stability during vulnerable phases but contradicts the intended decentralization ethos. Understanding how to balance these aspects might be critical in the evolution of digital financial ecosystems.