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Cunicula's game theory primer.pdf

Cunicula's game theory primer.pdf

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Published by: cuncicula on Nov 07, 2013
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01/25/2014

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Cunicula’s Game Theory Primer for Computer Scientists invovled in BitcoinAbstract: Recently, a couple of incompetent computer scientists released awhite paper entitled "Majority is not Enough: Bitcoin Mining is Vulnerable."The paper represents a fundamental misunderstanding of the incentives un-derlying the bitcoin protocol. I expected bitcoin devs and other smart peopleto immediately dismiss the paper because it gets the relevant game theory allwrong. This hasn’t happened. This paper o¤ers a brief explanation of incentivessupporting honest mining and explains why the incompetent computer scientistsare incompetent.1) Bitcoin mining is and always has been a prisoner’s dilemna.The author’s supposed revelation is that bitcoin is "not incentive compati-ble". In slightly, more familar terms this means that bitcoin mining is similarto the prisoner’s dilemana. In other words, mining should degenerate into a badequilibrium of sel…sh mining. The payo¤s from a standard type of prisoner’sdilemna game as shown below.
a
 =
 good a
 =
 selfisha
0
=
 good
 (1
;
1) (0
;
2)
a
0
=
 selfish
 (2
;
0) (1
;
1)
The game has a unique nash equilbirum as shown in the bottom right corner.This is the sel…sh equlibrium where everyone adopts sel…sh mining.Here I have made the good,good and sel…sh, sel…sh payo¤s symmetric. Iintroduce price e¤ects later that cause asymmetry.This is an extremely obvious point. It is not a noteworthy research result.Any pool could announce, hey I’m going to conduct a 51% attack and I willpay a 10% premium on shares to the …rst 51% of hashing power that joinsme. Short-sighted miner’s would respond by joining the pool and earning 10%higher pro…ts than they normally would. If everyone is very short-sighted, thethe 51% attack would succeed. We do not need to think about sophisticatedmining strategies to see this.2) Bitcion mining is a dynamic game. In a dynamic setting, the prisonersrationally choose to be good rather than sel…sh. The so-called prisoner’s dilemnabecomes a non-issue.The dynamic prisoner’s dilemna is modelled recursively in discrete time asshown in the equation below.
V  
 (
s
t
1
;
k
) = max
a
f
 p
(
s
t
1
)
ku
(
a;a
0
) +
 V  
 (
s
t
(
a;a
0
);
k
)
g
V  
 (
s
t
1
;
k
)
 is a value function equal to the miner’s expected lifetime payo¤.
s
t
1
(
a:a
0
)
 describes the choice of strategies in the previous period. Here thisis just
 s
t
1
 =
 someone played selfish
 or
 s
t
1
 =
 everyone was good
1
 
 p
(
s
t
1
)
 is the current bitcoin price as a functoin of 
 s
t
1
We can assume that
 p
(
someone played selfish
) =
 p
selfish
 < p
good
 =
 p
(
everyone was good
)
:
That is, sel…sh behavior will have a negative e¤ect on future bitcoin prices.
k
 is the number of units of mining hardware owned by the miner. I amassuming this remains constnat over time.
a
 is the miner’s choice of strategy. There are two options here
 a
 =
 good
 or
a
 =
 selfish:a
0
is the strategy pursued by other miners. There are two options here
a
0
=
 good
 or
 a
0
=
 selfish:u
(
a;a
0
)
 is the payo¤ from one period of the game (refer to the two by twotable above)
 
 is the discount factor representing a lower valuation on payo¤s realized inthe future. It must be between
 0
 and
 1
:
The basic prisoners dilemna models the payo¤ in a single period, focusingon
 u
(
a;a
0
)
:
 This is incorrect. The miner enter’s the next period with
 k
 unitsof hardware.Surely he will cares if these hardware drop in value. This is the essentialpoint. Because he own’s specialized hardware, the miner has a stake in thesystem.In a dynamic setting, the one period game is called a "subgame." The basicdynamic period equilibrium concept is called a subgame perfect equlibrium.Let’s look at the ’good’ subgame perfect equilibrium.Suppose that all miners adopt the following strategy (called a grim triggerstrategy)1) If anyone has ever played sel…sh in the past, then play sel…sh.2) If no one has ever played sel…sh in the past, then play good.Suppose all other miners have been good in the past. Therefore our minerbelieves they will to continue to be good. (why would he believe otherwise?)Our miner can choose either cheat or be good. If he cheat’s then he gets oneperiod of good payo¤s and a whole lifetime of bad payo¤s.The expected value from cheating is
2
 p
high
k
 +
  
1
 
  kp
low
The expected value from being good is
kp
high
 +
  
1
 
  kp
high
 =
 k
 11
 
  
 p
high
This tells us that playing good is a subgame perfect equilibrium as long as2

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