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I'm currently reading Digital Gold by Nathaniel. As I progress, its clearer that bitcoin might or might not be a great economic tool but its an awesome case stu

I'm currently reading Digital Gold by Nathaniel. As I progress, its clearer that bitcoin might or might not be a great economic tool but its an awesome case study in game theory. I think the real innovation of Satoshi (whether he intended it or not) is to keep the players (how ever big or small they are) chained up to the eco system. At every level of new expansion, new players (usually bigger than current ones) join in the game and gets entrapped in the net. Then the game uses these players's strength to pull it self forward. There are real risks to bitcoin at points of these expansions. My guess is that if too strong players join at a time when the net is not yet ready for them, there is a risk that they break free of the net and destroy bitcoin. Here too game theory comes to its rescue. Assuming the net is not strong enough at any given time, there is little chance that the whole thing attracts stronger players. This is why I believe bitcoin has better chances of success than other crypto currencies. Its a constantly evolving monster that will gobble up everything eventually (Isn't it beautiful :))

roymurdock 9y ago
I haven't read the book, but this 2013 paper from Princeton economists Kroll, Davey, and Felten [1] describes the game theory that keeps strong players from destroying the network (aka a 51% or "goldfinger" attack): "It is often asserted (for example, in the Bitcoin white paper [22]) that a cartel can double-spend Bitcoins. In a strict sense, this is true: a cartel can spend a Bitcoin by paying it to a player Alice, receiving goods or services, and then shifting the consensus choice of history to a branch where that coin is instead paid to a different player Bob... Bitcoins have value because people are willing to trade them for goods and services. If players were unwilling to accept Bitcoins for trade or unwilling to spend Bitcoins for fear of having their payments nullified, the value of Bitcoins would diminish significantly as players lost confidence in the system... Worse, because players are encouraged to generate a new identity for each transaction and because identities are not linked to any side information, players cannot easily determine whether a proffered payment is coming from the double-spending cartel or an honest user. A rational player should refuse to accept any payments when there is a significant threat of double-spending. As a cartel must outmine the entire Bitcoin network and thus outspend the entire Bitcoin network for as long as it would remain a cartel, we believe it is very unlikely that a cartel could double-spend enough to recover the cost of the attack." The question at this stage, with the price of Bitcoin so high, is if this rationale still holds. What if a cartel were able to double spend one (or multiple) of the big 40 "whale" Bitcoin accounts before destroying the entire network? The one-time billion dollar theft could offset the cost of putting together the computing power to pull off a 51% attach, especially if the cartel assembled that power maliciously through a botnet. [1] http://www.econinfosec.org/archive/weis2013/papers/KrollDaveyFeltenWEIS2013.pdf http://www.econinfosec.org/archive/weis2013/papers/KrollDave...
- option_greek 9y ago
  > What if a cartel were able to double spend one (or multiple) of the big 40 "whale" Bitcoin accounts before destroying the entire network? I don't think 51% attacks work that way. You can't spend at all without the private keys of the whales because the network nodes won't trust the chain. If they have enough power, they can double spend their own coins by rewinding the history till the point they are spent. This is why around 6 blocks time is considered as a must to prevent double spends. In fact as the price increases the lost opportunity cost also increases (they could have just mined and gotten the reward instead of attacking). How ever, there are still players out of the net currently who don't care about the rewards and have enough hash power (governments). It's just that at this point of time they are ambivalent to the little monster that is growing up before their eyes (like a cute little dinosaur).
  - mycall 9y ago
    > You can't spend at all without the private keys of the whales because the network nodes won't trust the chain. Here is a simple library to recover the private key of ECDSA and DSA signatures sharing the same nonce k and therefore having identical signature parameter r [1] https://github.com/tintinweb/ecdsa-private-key-recovery https://github.com/tintinweb/ecdsa-private-key-recovery
    - AgentME 9y ago
      That only gets you access to the private keys of specific accounts that had previously made transactions in a specific insecure way in old uncommon and no-longer-used clients. That's not at all a generic attack.
- Slartie 9y ago
  You cannot build a botnet large enough to out-hash the army of dedicated ASICs that's responsible for todays' Bitcoin hash rate. Not even a botnet that merges all personal computers in the world would be able to do that - ASICs are just that much faster. But - some miners and mining pool operators are rumored to be among the bigger Bitcoin whales themselves. They already own (or at least control) a large part of the ASIC hashing power. None of them is even close to 51% today, but then you also don't really need 51% to pull off a double-spend attack, 30-40% should do it, as long as you pull that hashing power from the legit network at the same time. A cartel made up of the top miners and mining pool owners should be able to comfortably reach this critical mass of hash power. So effectively it comes down to whether they assume that it's better for them financially to continue supporting the networks' health or to pull a one-time heist, destroying the networks' credibility in the process. For the moment, the former seems to be still true. But nobody knows for sure whether that may change some day...
elmar 9y ago
One big problem of the incentive system of Bitcoin is that it doesn't reward "Full-node operation" only "Mining operation", the result would be a more distributed and democratic system.
- anonymous5133 9y ago
  The reason is because it isn't expensive to run a full node while running the mining operation is expensive.
  - elmar 9y ago
    "No one anticipated pool mining, so we considered all miners to be full nodes and almost all full nodes to be miners. https://cointelegraph.com/news/satoshis-best-kept-secret-why-is-there-a-1-mb-limit-to-bitcoin-block-size https://cointelegraph.com/news/satoshis-best-kept-secret-why...
dsacco 9y ago
> I'm currently reading Digital Gold by Nathaniel. As I progress, its clearer that bitcoin might or might not be a great economic tool but its an awesome case study in game theory. Yes, and you can abstract that observation from blockchains to cryptography in general, which is the underlying foundation of blockchain technology’s game theoretic fault tolerance. This is particularly clear once you move closer to cryptography’s theoretical and mathematical foundations and away from specific applications (such as encryption or authentication). Many cryptography textbooks begin with an elementary definition and discussion of the field using notions such as confidentiality, integrity, authentication, non-repudiation, etc. These are all correct, but I prefer Oded Goldreich’s definition, from his Foundations of Cryptography: Cryptography is concerned with any problem in which one wishes to limit the effects of dishonest users. In an abstract sense, cryptography has a direct mapping from game theory, and can be considered the use of computational complexity to resolve scenarios in adversarial relationships. If you’re enjoying looking at blockchains through this lens, you might want to read a few papers on cryptogenography, or zero knowledge proofs (the latter has far more literature). There is also a lot of fun research that uses game theory to model fault tolerance and economics in blockchains.
thisisit 9y ago
The problem is everything hinges on "rationality" of a player. And there might be a time when the rational decisions of a game theory goes out of the window and things don't work any more.
narrator 9y ago
Now apply this reasoning to our current financial system and how it works. Think of the system in terms of people making decisions and not in terms of perfectly continuous mathematical models. Debt is not a physical object. Inflation and spending are not physical forces of nature.
anonymous5133 9y ago
>Its a constantly evolving monster that will gobble up everything eventually (Isn't it beautiful :)) but the problem is that it isn't really. Bitcoin coin cash implemented big block size to expand the transaction capacity. Meanwhile bitcoin stuck with the small block size.
- AgentME 9y ago
  ... And Bitcoin got the segwit upgrades that fixes the transaction malleability issue, enabling users to make new types of contract transactions like payment channel and lightning network transactions, which Bitcoin Cash specifically refused. One thinks it's evolving by tweaking constants, and one is working on enabling new things.
mirimir 9y ago
> Its a constantly evolving monster that will gobble up everything eventually (Isn't it beautiful :)) As I recall, that has always been part of the dream. Plus the potential for early adopters to become unimaginably wealthy ;)
majani 9y ago
The psychological process you've described happens with any investment.
lamby 9y ago
I was about to start this book but noticed it was from 2015. Is it still relevant? :)
- option_greek 9y ago
  Actually I think bitcoin's history is more relevant than its present :). Definitely worth a read.

roymurdock 9y ago

I haven't read the book, but this 2013 paper from Princeton economists Kroll, Davey, and Felten [1] describes the game theory that keeps strong players from destroying the network (aka a 51% or "goldfinger" attack): "It is often asserted (for example, in the Bitcoin white paper [22]) that a cartel can double-spend Bitcoins. In a strict sense, this is true: a cartel can spend a Bitcoin by paying it to a player Alice, receiving goods or services, and then shifting the consensus choice of history to a branch where that coin is instead paid to a different player Bob... Bitcoins have value because people are willing to trade them for goods and services. If players were unwilling to accept Bitcoins for trade or unwilling to spend Bitcoins for fear of having their payments nullified, the value of Bitcoins would diminish significantly as players lost confidence in the system... Worse, because players are encouraged to generate a new identity for each transaction and because identities are not linked to any side information, players cannot easily determine whether a proffered payment is coming from the double-spending cartel or an honest user. A rational player should refuse to accept any payments when there is a significant threat of double-spending. As a cartel must outmine the entire Bitcoin network and thus outspend the entire Bitcoin network for as long as it would remain a cartel, we believe it is very unlikely that a cartel could double-spend enough to recover the cost of the attack." The question at this stage, with the price of Bitcoin so high, is if this rationale still holds. What if a cartel were able to double spend one (or multiple) of the big 40 "whale" Bitcoin accounts before destroying the entire network? The one-time billion dollar theft could offset the cost of putting together the computing power to pull off a 51% attach, especially if the cartel assembled that power maliciously through a botnet. [1] http://www.econinfosec.org/archive/weis2013/papers/KrollDaveyFeltenWEIS2013.pdf http://www.econinfosec.org/archive/weis2013/papers/KrollDave...

option_greek 9y ago
> What if a cartel were able to double spend one (or multiple) of the big 40 "whale" Bitcoin accounts before destroying the entire network? I don't think 51% attacks work that way. You can't spend at all without the private keys of the whales because the network nodes won't trust the chain. If they have enough power, they can double spend their own coins by rewinding the history till the point they are spent. This is why around 6 blocks time is considered as a must to prevent double spends. In fact as the price increases the lost opportunity cost also increases (they could have just mined and gotten the reward instead of attacking). How ever, there are still players out of the net currently who don't care about the rewards and have enough hash power (governments). It's just that at this point of time they are ambivalent to the little monster that is growing up before their eyes (like a cute little dinosaur).
- mycall 9y ago
  > You can't spend at all without the private keys of the whales because the network nodes won't trust the chain. Here is a simple library to recover the private key of ECDSA and DSA signatures sharing the same nonce k and therefore having identical signature parameter r [1] https://github.com/tintinweb/ecdsa-private-key-recovery https://github.com/tintinweb/ecdsa-private-key-recovery
  - AgentME 9y ago
    That only gets you access to the private keys of specific accounts that had previously made transactions in a specific insecure way in old uncommon and no-longer-used clients. That's not at all a generic attack.
Slartie 9y ago
You cannot build a botnet large enough to out-hash the army of dedicated ASICs that's responsible for todays' Bitcoin hash rate. Not even a botnet that merges all personal computers in the world would be able to do that - ASICs are just that much faster. But - some miners and mining pool operators are rumored to be among the bigger Bitcoin whales themselves. They already own (or at least control) a large part of the ASIC hashing power. None of them is even close to 51% today, but then you also don't really need 51% to pull off a double-spend attack, 30-40% should do it, as long as you pull that hashing power from the legit network at the same time. A cartel made up of the top miners and mining pool owners should be able to comfortably reach this critical mass of hash power. So effectively it comes down to whether they assume that it's better for them financially to continue supporting the networks' health or to pull a one-time heist, destroying the networks' credibility in the process. For the moment, the former seems to be still true. But nobody knows for sure whether that may change some day...

elmar 9y ago

One big problem of the incentive system of Bitcoin is that it doesn't reward "Full-node operation" only "Mining operation", the result would be a more distributed and democratic system.

anonymous5133 9y ago
The reason is because it isn't expensive to run a full node while running the mining operation is expensive.
- elmar 9y ago
  "No one anticipated pool mining, so we considered all miners to be full nodes and almost all full nodes to be miners. https://cointelegraph.com/news/satoshis-best-kept-secret-why-is-there-a-1-mb-limit-to-bitcoin-block-size https://cointelegraph.com/news/satoshis-best-kept-secret-why...

dsacco 9y ago

> I'm currently reading Digital Gold by Nathaniel. As I progress, its clearer that bitcoin might or might not be a great economic tool but its an awesome case study in game theory. Yes, and you can abstract that observation from blockchains to cryptography in general, which is the underlying foundation of blockchain technology’s game theoretic fault tolerance. This is particularly clear once you move closer to cryptography’s theoretical and mathematical foundations and away from specific applications (such as encryption or authentication). Many cryptography textbooks begin with an elementary definition and discussion of the field using notions such as confidentiality, integrity, authentication, non-repudiation, etc. These are all correct, but I prefer Oded Goldreich’s definition, from his Foundations of Cryptography: Cryptography is concerned with any problem in which one wishes to limit the effects of dishonest users. In an abstract sense, cryptography has a direct mapping from game theory, and can be considered the use of computational complexity to resolve scenarios in adversarial relationships. If you’re enjoying looking at blockchains through this lens, you might want to read a few papers on cryptogenography, or zero knowledge proofs (the latter has far more literature). There is also a lot of fun research that uses game theory to model fault tolerance and economics in blockchains.

thisisit 9y ago

The problem is everything hinges on "rationality" of a player. And there might be a time when the rational decisions of a game theory goes out of the window and things don't work any more.

narrator 9y ago

Now apply this reasoning to our current financial system and how it works. Think of the system in terms of people making decisions and not in terms of perfectly continuous mathematical models. Debt is not a physical object. Inflation and spending are not physical forces of nature.

anonymous5133 9y ago

>Its a constantly evolving monster that will gobble up everything eventually (Isn't it beautiful :)) but the problem is that it isn't really. Bitcoin coin cash implemented big block size to expand the transaction capacity. Meanwhile bitcoin stuck with the small block size.

AgentME 9y ago
... And Bitcoin got the segwit upgrades that fixes the transaction malleability issue, enabling users to make new types of contract transactions like payment channel and lightning network transactions, which Bitcoin Cash specifically refused. One thinks it's evolving by tweaking constants, and one is working on enabling new things.

mirimir 9y ago

> Its a constantly evolving monster that will gobble up everything eventually (Isn't it beautiful :)) As I recall, that has always been part of the dream. Plus the potential for early adopters to become unimaginably wealthy ;)

majani 9y ago

The psychological process you've described happens with any investment.

lamby 9y ago

I was about to start this book but noticed it was from 2015. Is it still relevant? :)

option_greek 9y ago
Actually I think bitcoin's history is more relevant than its present :). Definitely worth a read.