Blockchain technologies have been rapidly adopted for the creation of cryptocurrencies and have been explored for a myriad of applications. While this is of important economic interest, the computer science behind how blockchains operate to provide security and provenance has been largely inaccessible to economists. This book is a bridge between the computer science and the economics of blockchains.
The focus is on the value and the achievement of blockchain consensus; that is, how distributed and independent nodes are able to reach an agreement on what the current state of digital ledgers, that are the product of blockchains, are. The book shows that the goals of computer scientists in designing blockchains place very high weight on security beyond what an economist trained in game theory and mechanism design would require. It shows how blockchains can be redesigned to account for key economic trade-offs, and will be of interest to researchers and students of economics, financial technology and computer science, alongside policymakers.
Author(s): Joshua Gans
Publisher: Palgrave Pivot
Year: 2023
Language: English
Pages: 127
City: London
Acknowledgements
Contents
List of Figures
1 Introduction
References
2 The Value of Blockchain Consensus
2.1 Defining Blockchains
Ledgers
Distributed Ledgers
Blocks of Transactions
How to Timestamp a Digital Document
Distributed Blockchain Networks
2.2 The Driver of Value
Trust
Enforceable Contracts
Cheap Verification
Cryptocurrencies: Verification-Enabled Payments
2.3 Consensus and Trust
References
3 Security Versus Speed
3.1 Byzantine Fault Tolerance
Idealised Environment
Malicious Nodes
No Digital Signatures
Asynchronous Networks
What Determines the Power of Malicious Actors?
Summarising the Trade-Off
3.2 The Longest Chain Rule
The Mechanics of LCR Coordination
Block Finality
3.3 Conclusion
References
4 Permissioned Versus Permissionless
4.1 Bitcoin Proof of Work
4.2 Permissionless Leader Selection
4.3 Attacks on Permissionless Blockchains
The Costs of a Double-Spend Attack
4.4 Comparison with Permissioned Network
Transaction Safety in a Permissioned Network
Comparison
Cost Incidence
4.5 Conclusion
References
5 Proof of Work Versus Proof of Stake
5.1 Proof of Stake in a Permissionless Environment
A Longest Chain Rule Approach
A BFT Approach
5.2 Comparison with Proof of Work
References
6 Cryptography Versus Incentives
6.1 Blockchain Front-Running
6.2 A Model of Front-Running
6.3 Using Cryptography
6.4 A Mechanism to Deter Front-Running
The Need to Discretise Time
The Single Legitimate Claimant Case
Further Issues
The Multiple Legitimate Claimant Case
Implementation Choices
6.5 Conclusion
References
7 Rules Versus Mechanisms
7.1 What Is Blockchain Truth?
7.2 Mechanism for Byzantine Fault Tolerance
A Simultaneous Report Mechanism
Robustness to Multi-node Attacks
7.3 Mechanism to Resolve Forks
A Solomonic Mechanism
7.4 Conclusion
References
References
Index