Bitcoin. when a decentralised economy becomes centralised. ClaudioJ Tessone. URPP Social Networks

Transcription

1 Bitcoin when a decentralised economy becomes centralised ClaudioJ Tessone URPP Social Networks Scientifica

2 Contents Prelude Introduction to Bitcoin Mining concentration Economic flow Governance Take-home messages Bitcoin

3 URPPSocialNetworks Established in The URPPs are interdisciplinary and cross-faculty and promote collaboration within the University Bitcoin URPP Social Networks

4 URPPSocialNetworks Established in The URPPs are interdisciplinary and cross-faculty and promote collaboration within the University Our main goal is to examine the relationships between social structures and socio-economic behaviour by focusing on complex interconnected systems instead of analysing individual actions Bitcoin URPP Social Networks

5 URPPSocialNetworkswithinUZH Bitcoin URPP Social Networks

6 URPPSocialNetworkswithinUZH URPP Social Networks Marketing Management appliedquestions data analysis Economics appliedquestions theories Computer Science Complex Systems Network Science modelling methods Bitcoin URPP Social Networks

7 URPPSocialNetworkswithinUZH URPP Social Networks Marketing Management appliedquestions data analysis Economics appliedquestions theories Computer Science Complex Systems Network Science modelling methods IBW Bitcoin URPP Social Networks

8 URPPSocialNetworkswithinUZH Faculty of Business, Economics and Informatics URPP Social Networks Marketing Management appliedquestions data analysis Economics appliedquestions theories Computer Science Complex Systems Network Science modelling methods IBW Bitcoin URPP Social Networks

9 Bitcoin Prelude Prelude

10 Theoriginsofcomputing Mainframesinthe s Bitcoin Prelude

11 Theoriginsofcomputing Mainframesinthe s Monolithic concentrated power Client / Server infrastructure Dumb terminals Bitcoin Prelude

12 Theoriginsofcomputing Mainframesinthe s Monolithic concentrated power Client / Server infrastructure Dumb terminals All information stored and to be retrieved from central point Bitcoin Prelude

13 Theoriginsofcomputing Mainframesinthe s Monolithic concentrated power Client / Server infrastructure Dumb terminals All information stored and to be retrieved from central point Fragile system single point of failure Bitcoin Prelude

14 Internet Adecentralisedsolution Inthe stheinternetwasasmall collective of computers Bitcoin Prelude

15 Internet Adecentralisedsolution Inthe stheinternetwasasmall collective of computers Distributed Allows for heterogeneous clients Resilient to failure Bitcoin Prelude

16 Internet Adecentralisedsolution Bitcoin Prelude

17 Internet Adecentralisedsolution The internet today is still resilient More heterogeneous than ever Bitcoin Prelude

18 Internet Adecentralisedsolution The internet today is still resilient More heterogeneous than ever but it evolved into the largely decentralised hierarchical system we know today Distributed Bitcoin Prelude

19 Centralisedentities Over time as Economy evolved in society central organisations have emerged that control the monetary supply Bitcoin Prelude

20 Centralisedentities Over time as Economy evolved in society central organisations have emerged that control the monetary supply Seigniorage Bitcoin Prelude

21 Centralisedentities Over time as Economy evolved in society central organisations have emerged that control the monetary supply Seigniorage Fiatmoney Central Banks control money supply by fixing interest rates Bitcoin Prelude

22 Electronicpayments Transactionsinthedigital era Bitcoin Prelude

23 Electronicpayments Transactionsinthedigital era Economic transactions have regressed since electronic commerce Credit cards Debit transfers Remittances Bitcoin Prelude

24 Electronicpayments Transactionsinthedigital era Economic transactions have regressed since electronic commerce Credit cards Debit transfers Remittances All require a central authority that asserts identity and validates the transactions before they occur Bitcoin Prelude

25 Electronicpayments Transactionsinthedigital era Economic transactions have regressed since electronic commerce Credit cards Debit transfers Remittances All require a central authority that asserts identity and validates the transactions before they occur The obvious Centralised payment systems propagate trustworthy information because of trusted communication channels Bitcoin Prelude

26 Bitcoin Introduction to Bitcoin Introduction to Bitcoin

27 Bitcoin Adecentralisedapproach Imagine a decentralised currency There exist some immediate possible misbehaviour by the users A user claims to have assets she actually does not have A user attempts to use multiple times the same assets Bitcoin Introduction to Bitcoin

28 Bitcoin Adecentralisedapproach Imagine a decentralised currency There exist some immediate possible misbehaviour by the users A user claims to have assets she actually does not have A user attempts to use multiple times the same assets Risk of forging transactions / assets Bitcoin Introduction to Bitcoin

29 Bitcoin Adecentralisedapproach The difficult part How to propagate trustworthy information and create trust among peers in a decentralised system with non-trusted communication? A set of existing technologies combined allowed for the first solution to this problem Networking stack Cryptography Byzantine Generals Problem Make it computationally costly to add new information cheap to verify it Merkle Trees Bitcoin the first blockchain-based system as we understand it nowadays Bitcoin Introduction to Bitcoin

30 PublicLedger How to know the balance of each user in the system? A public ledger Bitcoin Introduction to Bitcoin

31 PublicLedger Transaction_ID Sender Receiver Amount F04EA23 Alice Bob 5 BTC 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC FB49204 Eva Faythe 2 BTC BC3 Bob Sam 5 BTC How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have 2005AB30C94045 Wendy Oscar 5 BTC Bitcoin Introduction to Bitcoin

32 PublicLedger Transaction_ID Sender Receiver Amount Received F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA23 How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have 2005AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

33 PublicLedger Transaction_ID Sender Receiver Amount Received F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA23 How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have 2005AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

34 PublicLedger Transaction_ID Sender Receiver Amount Received DAB3BA Trent Eva 2 BTC 1020BDA9590AD F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA23 How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have 2005AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

35 PublicLedger Transaction_ID Sender Receiver Amount Received DAB3BA Trent Eva 2 BTC 1020BDA9590AD F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE 2006B948ACF09EF Charles Oscar 4 BTC B3DE90 How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have Assets that do not belong to the sender can be discarded Bitcoin Introduction to Bitcoin

36 PublicLedger Transaction_ID Sender Receiver Amount Received DAB3BA Trent Eva 2 BTC 1020BDA9590AD F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE 2006B948ACF09EF Bob Oscar 5 BTC F04EA23 How to know the balance of each user in the system? A public ledger Obvious risk forging ownership of assets one does not have Assets that do not belong to the sender can be discarded Check that was not spent before! Bitcoin Introduction to Bitcoin

37 ElementsofBitcoin Users addr_03 1 BTC addr_04 3 BTC addr_10 3 BTC addr_11 0 BTC addr_12 4 BTC Set of individuals running a client and connected toa Peer-to-Peer network Each user in the verification network has a copy of the blockchain Bitcoin Introduction to Bitcoin

38 ElementsofBitcoin Users addr_03 1 BTC addr_04 3 BTC addr_10 3 BTC addr_11 0 BTC addr_12 4 BTC Set of individuals running a client and connected toa Peer-to-Peer network Each user in the verification network has a copy of the blockchain Each user in the network has a wallet with many addresses Anonymity in the network Which wallet hosts which addresses is a priori unknown Bitcoin Introduction to Bitcoin

39 Blocks How to keep the system consistent? Transaction_ID Sender Receiver Amount Received F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

40 Blocks Transaction_ID Sender Receiver Amount Received How to keep the system consistent? Bundle multiple verified new transactions into a block F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

41 Blocks Transaction_ID Sender Receiver Amount Received F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE FB49204 Eva Faythe 2 BTC DAB3BA How to keep the system consistent? Bundle multiple verified new transactions into a block Each block builds upon the previous one BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

42 Blocks Transaction_ID Sender Receiver Amount Received BA MINE Gandalf 12.5 BTC F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE DAD MINE Merlin 12.5 BTC FB49204 Eva Faythe 2 BTC DAB3BA Why should someone verify? Allow the creator of the block miner to add a transaction issued to him without an actual sender Plus fees paid by all transaction senders BC3 Bob Sam 5 BTC F04EA AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

43 Blocks Transaction_ID Sender Receiver Amount Received BA MINE Gandalf 12.5 BTC F04EA23 Alice Bob 5 BTC 1070BA782056FA 20020AC93670A6 Charles Dan, Alice 3 BTC, 1 BTC BE DAD MINE Merlin 12.5 BTC FB49204 Eva Faythe 2 BTC DAB3BA BC3 Bob Sam 5 BTC F04EA23 Money supply This is how Bitcoins enter into the system 2005AB30C94045 Wendy Oscar 5 BTC CB10EE Bitcoin Introduction to Bitcoin

44 Blockchain Block height An append-only sequential data structure Bitcoin Introduction to Bitcoin

45 Blockchain Block height An append-only sequential data structure New blocks can only be appended at the end of the chain Bitcoin Introduction to Bitcoin

46 Blockchain Block height An append-only sequential data structure New blocks can only be appended at the end of the chain To change a block in the middle of the chain all subsequent blocks need to be changed But the blockchain is replicated in all network nodes! Bitcoin Introduction to Bitcoin

47 Blockchain Block height An append-only sequential data structure New blocks can only be appended at the end of the chain To change a block in the middle of the chain all subsequent blocks need to be changed But the blockchain is replicated in all network nodes! History redundancy makes it resilient to attacks Bitcoin Introduction to Bitcoin

48 Mining Make it computationally costly to add new information cheap to verify it Bitcoin Introduction to Bitcoin

49 Mining f(prev block, verified tx, x) Make it computationally costly to add new information cheap to verify it Miners verifiers must solve by a difficult mathematical problem The solution is by brute force Bitcoin Introduction to Bitcoin

50 Mining f(prev block, verified tx, x) Make it computationally costly to add new information cheap to verify it Miners verifiers must solve by a difficult mathematical problem The solution is by brute force All the miners do the same The first that by chance finds a solution broadcasts it to others Bitcoin Introduction to Bitcoin

51 Mining f(prev block, verified tx, x) Make it computationally costly to add new information cheap to verify it Miners verifiers must solve by a difficult mathematical problem The solution is by brute force All the miners do the same The first that by chance finds a solution broadcasts it to others Why? He wants to ensure the creation transaction goes to him Bitcoin Introduction to Bitcoin

52 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork Bitcoin Introduction to Bitcoin

53 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork Bitcoin Introduction to Bitcoin

54 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network Bitcoin Introduction to Bitcoin

55 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network Bitcoin Introduction to Bitcoin

56 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network Bitcoin Introduction to Bitcoin

57 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network A node in the P P mines a new block and includes the transaction into the blockchain Bitcoin Introduction to Bitcoin

58 Theverificationdynamics addr_01 addr_01 5 BTC addr_02 3 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network A node in the P P mines a new block and includes the transaction into the blockchain The block with the TX is added to all the blockchains in the P P network Bitcoin Introduction to Bitcoin

59 Theverificationdynamics addr_01 8 BTC addr_01 0 BTC addr_02 0 BTC Users issue transactions which buildatransactionnetwork The transaction is broadcasted to the network A node in the P P mines a new block and includes the transaction into the blockchain The block with the TX is added to all the blockchains in the P P network The transaction occurred Bitcoin Introduction to Bitcoin

60 Theblockchainmechanics Bitcoin Introduction to Bitcoin

61 Theblockchainmechanics Bitcoin Introduction to Bitcoin

62 Theblockchainmechanics Nodes mine searching for a new block Diffusion of blocks within the network Consensus is unknown to nodes Diffusion does not occur over nodes which have the same height Bitcoin Introduction to Bitcoin

63 Theimportanceofminingdiversity Diverse Concentrated When mining becomes concentrated large portions of the verification is performed by the same node It can decide which transactions are accepted and which not Others lose incentive to participate of verification no reward Vicious cycle Bitcoin Introduction to Bitcoin

64 Currencysupply? Anyone can participate of the money supply i e it is decentralised Bitcoin Introduction to Bitcoin

65 Currencysupply? Anyone can participate of the money supply i e it is decentralised Monetarysupplypolicy arbitrarydecision Bitcoin Introduction to Bitcoin

66 Currencysupply? Anyone can participate of the money supply i e it is decentralised Monetarysupplypolicy arbitrarydecision Predictable Circulating money piece-wise linearly over time Every two years supply rate halves Bitcoin Introduction to Bitcoin

67 Currencysupply? Anyone can participate of the money supply i e it is decentralised Monetarysupplypolicy arbitrarydecision Predictable Circulating money piece-wise linearly over time Every two years supply rate halves Reason? Incentivise early adoption even in absence of transactions Bitcoin Introduction to Bitcoin

68 Bitcoin Mining concentration Mining concentration

69 Theeffectoftheincentivescheme Hash Rate [Hash/sec] BTC Top Year This created an Arms race to devote more resources to mining Nowadays the computational power devoted to mine bitcoins is 10 4 the combined power of Top Bitcoin Mining concentration

70 Theeffectoftheincentivescheme Hash Rate [Hash/sec] BTC Top Year Price [USD/BTC] Fundamental Value [USD] This created an Arms race to devote more resources to mining Nowadays the computational power devoted to mine bitcoins is 10 4 the combined power of Top Until the price crashed to the production value Bitcoin Mining concentration

71 Incentivescheme Mining Pool Participation Theil Index log( 1-P(Rank) ) block height Rank The incentive scheme was tailored to foster early adoption But the outcome is that everybody has an incentive to mine now instead of in the future Bitcoin Mining concentration

72 Incentivescheme Mining Pool Participation Theil Index log( 1-P(Rank) ) block height Rank The incentive scheme was tailored to foster early adoption But the outcome is that everybody has an incentive to mine now instead of in the future Only large-scale investors can afford nowadays Bitcoin mining Bitcoin Mining concentration

73 Bitcoin Economic flow Economic flow

74 Bitcoinuserdetection The detection is based on identifying addresses that belong to the same user wallets Bitcoin Economic flow

75 Bitcoinuserdetection The detection is based on identifying addresses that belong to the same user wallets Bitcoin Economic flow

76 Bitcoinuserdetection addr_11 addr_12 addr_14 addr_13 addr_01 addr_02 addr_03 The detection is based on identifying addresses that belong to the same user wallets Incorrect aggregation is reduced as much as possible The picture I will provide is much more egalitarian than real world Bitcoin Economic flow

77 Bitcoinuserdetection CCDF No. Addresses power-law fit α = 2.14 power-law fit α = 1.96 power-law fit α = 2.22 power-law fit α = 2.22 power-law fit α = 2.32 Year 2010 Year 2011 Year 2012 Year 2013 Year 2014 CCDF Bitcoin Balance Unfiltered Miners Pure users No. Addresses Bitcoin Balance Participants of the transactions can be Miners End-Users Bitcoin Economic flow

78 Bitcoinuserdetection CCDF No. Addresses power-law fit α = 2.14 power-law fit α = 1.96 power-law fit α = 2.22 power-law fit α = 2.22 power-law fit α = 2.32 Year 2010 Year 2011 Year 2012 Year 2013 Year 2014 CCDF Bitcoin Balance Unfiltered Miners Pure users No. Addresses Bitcoin Balance Participants of the transactions can be Miners End-Users Very broad distribution in the number of addresses per user Detection is fundamental to understand economic activity in the Bitcoin economy Very broad wealth distribution Much more unequal than unequal contries Gini index= 0.9 Bitcoin Economic flow

79 Bitcoinflow Complete Supply Circulating Supply Total Supply 10 6 Bitcoin Year Bitcoin supply designed to increase linearly with time However circulating supply is sizeable smaller Bitcoin Economic flow

80 Bitcoinflow Total Supply 10 6 Bitcoin Complete Supply Circulating Supply N(t), Ni(t) End-users Miners Total Year Year Bitcoin supply designed to increase linearly with time However circulating supply is sizeable smaller Bitcoin Economic flow

81 Bitcoinflow Total Supply 10 6 Bitcoin Complete Supply Circulating Supply N(t), Ni(t) End-users Miners Total User share End-Users Miners Year Year Year Bitcoin supply designed to increase linearly with time However circulating supply is sizeable smaller User adoption shows two regimes of adoption early adopters miners end-users Therelativeproportionofusersinvolvedinsupplybecomes negligible Bitcoin Economic flow

82 Bitcointransactionnetwork We constructed the network encompassing all transactions in the Bitcoin economy in a given time window 1.0 Bitcoin N n (1) /Nn Year After users usage a giant connected component emerges Bitcoin Economic flow

83 Bitcointransactionnetwork We constructed the network encompassing all transactions in the Bitcoin economy in a given time window Total Miner End-user Miner End-user k (o) i,max k (o) M k(o) U Ci Year Year Year After users usage a giant connected component emerges Miners show larger degree and lower clustering than end-users Network location Topologically end-users and miners occupy different locations in the network Bitcoin Economic flow

84 DescriptionoftheBitcoineconomy πi Relative Wealth i= User i= Miner Miners still hold a sizeable portion of the total amount of bitcoins in circulation Year Bitcoin Economic flow

85 DescriptionoftheBitcoineconomy Ti j/ j T i j Miner to Miner Miner to end-user End-user to miner End-user to End-user Year Miners still hold a sizeable portion of the total amount of bitcoins in circulation Transition in the transaction behaviour Nowadays most transactions are miner end-user end-user end-user Bitcoin Economic flow

86 Implications 1.0 End-Users Miners i= User i= Miner Miner End-user User share πi Relative Wealth k (o) M k(o) U Ci Year Year Year Year Bitcoin Economic flow

87 Implications Centralisation of supply wealth inequality Because of misplaced incentives Bitcoin has evolved into a state that works in a stark contrast with its design principles Bitcoin Economic flow

88 Bitcoin Governance Governance

89 TheeffectofGovernance Bitcoin is openly developed following an Open Source Software OSS approach Bitcoin Governance

90 Howtoreactifoneisdeveloper? Market Price [USD] Year Market Cap [USD] Year The main developers and other stakeholders have their own incentive to maintain the status quo Bitcoin Governance

91 Howtoreactifoneisdeveloper? Market Price [USD] Year Market Cap [USD] Year The main developers and other stakeholders have their own incentive to maintain the status quo Changes of monetary policy would damage tremendously the price Bitcoin Governance

92 Howtoreactifoneisdeveloper? Market Price [USD] Year Market Cap [USD] Year The main developers and other stakeholders have their own incentive to maintain the status quo Changes of monetary policy would damage tremendously the price Butthisissomethingthatweakensthesystem!!! Bitcoin Governance

93 Bitcoin Take-home messages Take-home messages

94 Take-homemessages Blockchain is indeed a technological breakthrough Incentive placement is indeed crucial Outcome far different from expected Bitcoin Take-home messages

95 Take-homemessages Blockchain is indeed a technological breakthrough Incentive placement is indeed crucial Outcome far different from expected This is a complex socio-technical system Designcannotbe technocratic butco-evolutionary Bitcoin Take-home messages

96 ClaudioJ Tessone URPP Social Networks claudio ch http //www socialnetworks uzh ch