Casper, Ethereum's secret weapon for dealing with "blockchain cartels" and why $100+ ETH isn't entirely unreasonable

in ethereum •  3 years ago  (edited)

 One of the reasons which could explain why Ethereum is justified in having a price over $100 is the fact that it is moving to Proof of Stake. This move to Proof of Stake is not just any Proof of Stake but is an in some ways revolutionary type of Proof of Stake in terms of how it handles game theory and it's ambitiousness. Many may already be aware that Bitcoin and many other cryptocurrencies are controlled by secret (or not so secret) cartels. A cartel is basically a team of individual economic actors who cooperate in order to gain and or maintain control. What sets Casper apart from Bitcoin is that Vlad Zamfir has identified the main security weakness in Nakamoto consensus which is inherent in the flawed economic assumption which inevitably leads to the growth of cartels which may take the form of mining pools for instance.

The pivotal quote from Vlad Zamfir which highlights the new way of thinking about the security and function of a consensus protocol says: "Blockchain architecture is mechanism design for oligopolistic markets."


What is Mechanism Design?

The mechanism design is the study and or use of economics, game theory, and incentives, toward a desired objective. In Bitcoin economic incentives are utilized to produce a sense of security under the assumption that the adversary is resource limited. A problem in Bitcoin is that from what I can see and identified by Vlad Zamfir in his blog post, the mechanism design is based on the assumption that all individuals will tend to compete and behave in rational ways. We can see now that not only are some individuals irrational but in other cases we see cooperation, collusion, in the furtherance of group objectives, such as in the formation of cartels which ultimately can control 51% of the hashing power.


Managing the side effects of concentration of power


It may have been Craig Grant who identified in a video that many big companies and other entities are partnering with Ethereum. It is in my opinion that partnerships with big powerful entities is the key to success in most markets but I reached this conclusion without even being aware of the mechanisms at play. Ethereum is attracting partnerships with banks, with governments, with blue chip software companies, and all of this is great for legitimacy, great for adoption, and great strategically in terms of integration into mainstream society. For this reason alone it may be justified that Ethereum has a very high market cap and with only around 90 million tokens this means the price must rise too.

But we must also consider the possibility that these big companies, these big entities, could someday dominate in Proof of Stake. It is possible that in the long term future or even in the near term future the Ethereum large stakeholders could be these very entities. Vlad Zamfir discusses this in the abstract and speaks about oligopolistic competition.

What is oligopolistic competition?

If we assume concentration of power will happen then we at some point typically end up in a state of oligopolistic competition between cartels or groups of cooperating forces in the market. A cartel which forms can gain control of the hashing power or gain control of the majority of stake. If we look at Bitshares for example then it is plausible that because Bitshares is Proof of Stake and was traded on exchanges that at some point the biggest holders of Bitshares would be centralized exchanges which will not necessarily have the same goals as the vast majority of users or even the developers. In a state of competition you would have various cartels and groups which compete for majority control of whatever is the pie, whether it's hashing power, or stakes.

Vlad Zamfir: "This was a big change from the bribing adversary model. Instead of assuming that every node is willing and able to accept bribes, I instead assumed that profit-maximizing cartels would form, and that validators who are not in a cartel are not coordinating their strategy choices. I could then look at economic security in terms of how much money a cartel of a given size would lose when they undermine a protocol guarantee."

Conclusion - What does this all mean?

One of the obvious possibilities is that Casper will improve on the traditional blockchain consensus assumptions by utilizing the current information and knowledge of behavioral history in Bitcoin and other chains. This knowledge can inform improvements to the game theoretic security modeling and mechanism design. Vlad Zamfir emphasizes cooperative game theory as an example of such an improvement. These improvements could mean Ethereum eventually could have a greater level of security than Bitcoin by improved assumptions which form the basis of traditional blockchain consensus security. Just as DPOS was an improvement on the assumptions at the time that mining was absolutely necessary and just as the current Graphene based on LMAX improves further on scalability, in the case of Casper we could see improvements in mechanism design, which can result in more censorship resistance.

As a buyer or token holder this could indicate that Ethereum could have a very bright future if Casper works as intended. Casper is correct by construction and has an excellent game theoretic foundation with a greater accuracy in it's assumptions than any other current consensus mechanism. In addition, with Proof of Stake it means the inflation rate of Ethereum will slow down tremendously which means to sell ETH today before that happens would be like selling Bitcoin before the first block reward halving and we see how that turned out for the guy who sold 10,000 BTC for pizza.

Casper makes Ethereum interesting and while I still have reservations about the security of the smart contracts the fact that Ethereum can eventually support sharding and the possible improvements of Casper mean it's likely going to be scalable if it all goes according to the plan. Even if the smart contracts are not considers extremely secure and require third party arbitration or some other mechanism it is the fact that many apps and many smart contracts can exist on Ethereum even if there isn't any billion dollar smart contracts. A bunch of little contracts add up over time.

If people investing in ETH are factoring in Casper, factoring in Proof of Stake, factoring in that eventually smart contracts will become safer, then it begins to make sense. A person thinking ahead might think they'd be a winner if they can acquire 1000 ETH today while ETH are being created at a somewhat fast rate. There is of course the risk that Casper fails, that Ethereum fails to transition to Proof of Stake, that a competitor better than Ethereum arises such as Rchain or Tauchain, but if Ethereum has plenty of useful smart contracts maybe it can have staying power regardless. 


References

1. https://medium.com/@Vlad_Zamfir/the-history-of-casper-chapter-4-3855638b5f0e#.sa86wzmdb

2. https://en.wikipedia.org/wiki/Mechanism_design
3. https://en.wikipedia.org/wiki/Cooperative_game_theory
4. https://www.slideshare.net/stathisgrigoropoulos/mechanism-design-theory-examples-and-complexity-final



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Thank you for an alternative opinion!

So far all I've heard is how PoS will kill ETH.

Another aspect of this switch will be, which coin will gain all of those ETH miners? I have a pretty good idea and hope I'm right. :)

I will say something controversial here, I suspect but cannot yet prove that Bitcoin is already controlled by blockchain cartels. Again it's not like you can easily prove such a thing but what is a mining pool? Mining pools concentrate hashing power. A mining club also would do something similar but again can we be sure there aren't cartels or secret miners clubs? What about Blockstream and who are the shareholders of that? What about various big businesses around Bitcoin?

Power in Bitcoin appears concentrated to the point where we see censorship, where we don't know which chain will be the real chain, will it be Bitcoin Unlimited or Bitcoin Core? These are competing interests. I'm not against the hard fork and currently prefer Bitcoin Unlimited but still I think Vlad Zamfir is onto something.

Proof of Stake or Proof of Work provide security based on assumptions. The logic if you are doing propositional logic or proofs or math depends on axioms. So we start with some basic assumptions but if we find out later that these assumptions are flawed then what shall we do?

Bitcoin is supposed to be secure based on the assumption that it would cost an adversary too much resources to capture 51% of the hashing power. I don't think this is true and Dan Larimer himself figured out that this assumption isn't true which is why DPOS exists in the first place. Proof of Work provides an illusion of great security because you see some big numbers (difficulty, hashing power, electricity cost, market cap) or whatever but the actual security rests on game theoretic mechanism design. It's the game theory which produces the security for Bitcoin and not hashing power.

This means Casper if they are right that cooperative game theory and their new starting assumptions are more accurate then it will mean the incentive structure will be better and that would mean more security based on better mechanism design. This means yes you can have greater security in Proof of Stake if as Vlad Zamfir noted that the cost for a cartel to undermine a protocol guarantee is of a sufficient size. This is basically, if you have a large enough economic deterrent this can produce security by the same means that the US in theory is secure from a Chinese invasion because it would wreck China's economy.

We need to keep kicking the crypto money game-theoretic can down the road a few times in 'good enough' fashion until our first sentient AI can build a really good one--or if that is impossible, at least it can be the first incorruptible 'benevolent dictator' that humans seem to desire.

I don't believe in sentient AI or that it would even be desirable. Ordinary AI can already help us build a cryptocurrency.

I was mostly kidding. Just make sure you buy-in to the Skynet ICO. If you are a sharehodler or miner, the robots might give you a pass. :-)

You do know that right now there is a some huge MLM ponzi scheme operating in China this time using Ethereum rather than BTC or LTC, right?

So?

Could you give some pointers?

Thanks for sharing.
Very nice.!!!
@dana-edwards