ChainLinkGod Podcast - Cryptoeconomic Security in the Bitcoin and Ethereum networks with Crypto___Oracle
Primer: ChainLinkGod and Crypto Oracle discuss the features of Bitcoin and Ethereum and what makes them cryptoeconomically secure. They discuss in length the advantages and disadvantages of each network, as well as the major difference between proof of work and proof of stake.
Aim
Discussing cryptoeconomic security:
Bitcoin context
Ethereum context
Setting the stage for their next podcast on the cryptoeconomic security of Chainlink Oracle Network
Cryptoeconomic Security
Definition: Cryptoeconomic security is essentially methods in which distributed cryptographic systems use financial incentives to form an honest and performant consensus about updating the state of the network
How do we use cryptocurrency to financially incentivize a group of independent entities (e.g. miners, validators) to work together and maintain a valid and consistently up-to-date ledger in the wake of possibly malicious actors?
Not just about paying people for work done, but to have financial incentives that are high enough to avoid various types of attacks
Categories Of Cryptoeconomic Incentives
Two categories:
Explicit
Implicit
Explicit incentives are direct incentives for the service provided by the miners/validators
Users pay a transaction fee to get their transactions processed. This is done to prevent spam attacks. This is not much of an issue for high-speed blockchains
Miners and validators get paid exclusively in an asset that's tied directly to the network. Their revenue is tied to the success of the network. Financially incentivized to behave honestly
Miners and validators have to put financial resources at stake. They have to lock up assets in a form of escrow, which can be taken away as a penalty if they engage in any malicious behaviour. Forces skin in the game for them
Implicit incentives are indirect incentives that are derived from the network and services but are not necessarily defined by the network itself
Most prominent form is participants taking on debt to purchase some type of resource or equipment in order to provide the service within the network
They are able to pay back the debt by earning revenue in the network
For example, to participate in the production of blocks in the Bitcoin network, one needs to have specialized mining hardware called application-specific integrated circuits (ASICs)
Participants in a cryptoeconomic secure network have ongoing financial exposure to the token they are earning (current holdings they have earned as well as future income)
If they corrupt the network, they not only corrupt the value of their tokens today but also their future revenue, since it's denominated in this token. In addition, the hardware that is used to mine those tokens get depreciated as well
Some networks use a more implicit design to get users to have long-term exposure to the asset by locking up their tokens
People cannot corrupt the network individually. They have to get the majority of the network to go along with them. The anonymous nature of the network participants creates social friction as would-be attackers do not necessarily know how to contact the other network participants
A lot of network participants are public businesses, ASIC manufacturers, mining pools, and staking pools. If they are malicious, they can come under regulation through fines and their entire business is effectively on the line
"So essentially, there's a strong incentive to not devalue the token, because you're going to devalue both your revenue, both the tokens you hold and the hardware you have, which actually generates those tokens." - ChainLinkGod
Hardware
Each network has a different hashing algorithm
Some require specialized hardware like ASICs while others use more generalized infrastructure such as graphics cards or cloud servers
An ASIC (application-specific integrated circuit) is a microchip designed for a special application
Easier to resell graphics cards compared to ASICs
ASICs are an in-demand commodity. Because of the economies of scale, it would be wiser to order hundreds of them to make your mining operations worthwhile
"The protocol doesn't say what you have to mine with, but realistically, only people with these special hardware actually make money." - ChainLinkGod
Bitcoin And Cryptoeconomic Security
Different Categories Of Cryptoeconomic Security
Financial rewards for honest participation in the network for miners. Miners provide computing power in return for Bitcoin. The miner who solved the block is rewarded with newly minted Bitcoin (Block rewards)
Block rewards are adjusted based on the hash power/number of entities currently mining Bitcoin
The miner who is the successful block producer also gets the transaction fees that are tacked on to those transactions within that block
Bitcoin does not have an inflationary supply. Eventually, the block rewards will run out and miners will be compensated only with transaction fees
Unless Bitcoin price skyrockets, the Bitcoin community has to consider how to keep the security budget large enough to ensure that the network is secure
Blockspace
Large debate on Bitcoin blockspace in 2017
The smaller the blockspace —> fewer transactions per block —> more decentralized network due to lower hardware requirements
Transactions per second can be increased by introducing a larger blockspace, but this would centralize the network as it requires more sophisticated hardware
Bitcoin's Security Budget
Need people to pay potentially more transaction fees. Else, it would not be worth the miner's time and they may slowly withdraw, leading to the centralization of Bitcoin
Current narrative is Bitcoin as a settlement layer while everything else occurs on the Lightning Network. Fees have to be expensive to ensure that the Bitcoin network is secure. ChainLinkGod does not see this narrative playing out anytime soon
People like to say that the block rewards will only run out in the year 2140. ChainLinkGod highlighted that people do not understand exponential decay. Hence, in 20 years, the block rewards would drop by 90%. The Bitcoin community needs to know what to do in the next couple of decades, not the next 100 years
People have proposed inflationary rewards but this goes against most Bitcoiners who got into the asset due to its fixed supply
Costs Miners Have To Take
Miners have to provide physical energy/hashing power to the network in order to mine a block
In Proof of Work, they use brute force to guess random numbers until a valid hash is found
Miners have to earn their money back or end up eating that loss. This is a deterrent to malicious activity
The narrative that Bitcoin uses as much energy as countries is a feature of Bitcoin. Attackers have to get at least 51% of the energy that the Bitcoin network consumes plus all the hardware as well
Complexity Required To Attack The Bitcoin Network
Difficult to pull off an attack
A malicious miner could cause the network to fork. But if the rest of the miners are honest, the malicious fork will be deemed illegitimate
The attacker would have wasted their resources trying to attack the network
Another type of attack involves some entity/country centralizing the ASIC supply and controlling the production of blocks. The algorithm can be changed to combat such an attack. This is a nuclear option as it makes everyone's ASIC worthless
Possible to roll back the chain to a specific point before the attack. Would effectively go against Satoshi Nakamoto's longest chain consensus but if everyone agrees, it is possible to revert back to a specific point
Ethereum And Cryptoeconomic Security
Comparisons To Bitcoin
Ethereum in its current state is very similar to Bitcoin
Ethereum will be moving towards the Proof of Stake consensus algorithm in Ethereum 2
Slight differences in parameters when compared to Bitcoin. For Ethereum, blocks are produced approximately every 13 seconds, with a 2 ETH subsidy
Last month, 50% of the miner income actually came from transaction fees rather than the block subsidy
Ethereum is not just generating cryptoeconomic security around its native token, but around the applications and smart contracts in general
For Proof of Work, miners need to constantly sell in order to cover their electricity costs. However, in a Proof of Stake consensus mechanism, there is no such cost. This leads to lower selling pressure and a higher ETH price
Moving From Proof Of Work To Proof Of Stake
Today, we have ASIC miners mining Ethereum. When the merge to Ethereum 2 happens, the network will be secured by validators
Instead of hardware, validators lock up 32 ETH per Proof of Stake node to gain the right to propose and validate blocks in the network
Have to enter a queue process in order to enter or exit the network as a validator. This is done to ensure that the network continues running
For Proof of Stake, the higher the price of ETH, the more secure the network becomes as attackers need to expend more resources to buy up the ETH supply
Ethereum Improvement Proposal (EIP) 1559 introduces another form of cryptoeconomic security. It was designed to make gas prices more predictable. The current model is a gas price auction, where people compete against others to get into a block. EIP 1559 replaces the auction model with a base fee that makes it more predictable making transactions
EIP 1559 burns the transaction fee/base fee, while only the tip goes to miners. This burning makes ETH more scarce. Combined with Proof of Stake, which lowers issuance, this makes Ethereum deflationary
Mechanism For Validating Blocks
While in the queue, the nodes are not competing to solve blocks
A random function is used to select a node to become a proposer than proposes blocks while other nodes serve as validators that attest to the validity of that block
Proof of Stake is energy efficient. It does not secure the network using thermodynamics energy; It uses the opportunity cost of capital to secure it
Cryptoeconomic security comes from validators having their stake slashed if they act maliciously
The more nodes that are being malicious at the same time, the greater the slashed stake becomes. This applies to:
Both malicious proposers and attestors
Attacks that span across multiple blocks
Attacks from multiple nodes in a single block
The whole design is to incentivize decentralization. If everyone runs their node on AWS (Amazon Web Services) and AWS goes down, the penalty will be much larger than using one's own hardware and the hardware goes down
"While staking pools are convenient, when that staking pool goes down or it accidentally signs two blocks, then you're going to lose more than if you made the same mistake on your own node." - ChainLinkGod
Proof of Stake is more secure than Proof of Work. With Proof of Work, one still has the hardware to continuously attack the network. For Proof of Stake, every attack attempt will result in the capital getting slashed
Inactivity And Slashing
Inactivity leak mechanism: Nodes will be slashed continuously over time if they are inactive
For example, if a node is down for 1 hour, it will make back all the capital if they are up for an hour
Inactivity leak decreases the capital of the inactive nodes continuously until all the active and honest nodes become the majority. Hence, there would not be a scenario where the network could not agree because the majority of the stake is offline
Differences In Yield
In Proof of Stake, everyone earns the same percentage yield regardless of their stake
In Proof of Work, a larger node will have a higher yield than a smaller node because of fixed costs, infrastructure, and hardware
Ethereum 2
Proof of Stake does not increase transaction throughput at all. It only replaces the consensus mechanism
Eth 2 will provide data shards, but these shards cannot do transactions, but can only hold data
Layer 2 rollups need to store their data on-chain. These rollups are going to continuously consume the main Ethereum blockspace
Rollups are not going to decrease demand for layer 1 but increase it. Rollups will support a lot more users. The main layer transactions may cost thousands of dollars, but because it's distributed across many users, the cost per user is very affordable
Bitcoin And Ethereum
Each has its own trade-offs
If people want sound money with a predictable supply issuance, they can take the Bitcoin route
If people want security guarantees of holding their assets using applications, then they can take the Ethereum route
With cross-chain solutions like Ren, people can bring their Bitcoin to Ethereum and experience the best of both worlds
Problem with the security budget if more Bitcoin is moved to other blockchains as Bitcoin miners do not accrue fees for transactions happening on other blockchains
Bitcoin could exist as a hard-capped token on Ethereum. This way, Ethereum will manage Bitcoin's security budget on its behalf. ChainLinkGod and Crypto Oracle does not see this scenario happening
When push comes to shove, the Bitcoin community will implement things to ensure the survival of Bitcoin as they have major financial incentives to see it succeed
Miner Extractable Value (MEV)
The ability for miners to include, exclude, or reorder transactions within a block
Allows them to front-run or censor transactions to extract value from the transactions of others
Some people argue that MEV is a form of cryptoeconomic security. ChainLinkGod disagrees with this proposition as MEV is malicious and comes at the expense of users
Flashbots and MEV auctions help prevent gas price auction wars, but they don't solve MEV
Chainlink Fair Sequencing Services (FSS) aims to mitigate MEV at the application level and layer 2
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