Continuing our post series on ongoing research in computer security and privacy here at Princeton, today I’d like to survey some of our research on Bitcoin. Bitcoin is hot right now because of the recent run-up in its value. At the same time, Bitcoin is a fascinating example of how technology, economics, and social interactions fit together to create something of value.
Our Bitcoin work started with a paper by Josh Kroll, Ian Davey and me, about the dynamics and stability of the Bitcoin mining mechanism. There was a folk theorem that the Bitcoin system was stable, in the sense that if everyone acted according to their incentives, the inevitable result would be that everyone followed the rules of Bitcoin as written. We showed that this is not the case, that there are infinitely many outcomes that are stable yet differ from the written rules of Bitcoin. So the rule-following behavior that we currently see is at best stable in the weaker sense that if everyone else is following the rules (and no one mining entity has too much power) then deviating from the rules will cost you money.
Beyond this, we have built a better understanding of the “political economy” of Bitcoin—how the Bitcoin community governs itself to keep the system operating well, despite the lack of a central authority and despite the complicated issues around the theoretical stability of the protocol. The ultimate goal of this line of work is to understand how Bitcoin is likely to deal with challenges in the future, and whether there are feasible changes that could improve the governance of Bitcoin.
Since then, we have started several more Bitcoin-related projects. My faculty colleague Arvind Narayanan (who joined us last year) as well as several more students are working on Bitcoin, and the pace has accelerated. We’re building tools to track and diagnose the behavior of the peer-to-peer network that Bitcoin participants use to spread information about what is happening. We’re looking at the dynamics of mining pools, in which a group of miners cooperate to spread the risk inherent in the mining process. We’re considering new types of double-spending attacks and how participants can defend against them.
Let me highlight one current project: we’re designing a decentralized prediction market using the Bitcoin protocol. Prediction markets enable participants to trade “shares” on potentially any event with well-defined outcomes, such as a presidential election or sporting events. The market prices of these shares can be interpreted as the probability of the event occurring. Prediction markets offer societal benefits because of this ability to accurately aggregate the wisdom of crowds. Decentralization can improve prediction markets in various ways including robustness to closure (see Intrade), greater expressivity in defining markets and outcomes, and potentially lower fees leading to more accuracy in pricing unlikely events.
There are two main difficulties: first, how can a pair of anonymous participants trade shares without a trusted party to facilitate the transaction? Second, who will arbitrate the outcome of events? This is far trickier than it sounds—even for outcomes that are completely uncontroversial, some entity or group of entities must be entrusted with the authority to declare the outcome, and there must be checks to prevent them from abusing their power. It turns out that the contract-signing capability and the consensus mechanism of Bitcoin or a Bitcoin-like system enable us to find solutions to these problems, and that is the crux of our research. This is a collaboration between Princeton researchers and soon-to-be-CITP-fellow Joseph Bonneau, Jeremy Clark at Concordia, and Andrew Miller at UMD.
The analogy is often made that Bitcoin will do to money what the Internet did to communications. If that is the case, many, many interesting and useful designs that use Bitcoin as an underlying protocol are waiting to be discovered. It’s an exciting time to be doing research in this area.
Cool! I love Bitcoin. I wish I had been at Princeton when this research was going on. I’ll look around at UVA where I am at currently to see if any students or faculty are doing Bitcoin research.
Perhaps the first prediction markets should be crops.
Weather is fairly easy to measure.
There could be several different weather reporting programs.
When 2 people agree to bet on the weather, they agree to obey the results of one of the weather reporting programs.
Accurate weather reporting is not free, they compete for who can sell the most accurate results.
Reporting programs are to cryptocurrencies what the evidence is to a court case.
Finally, we need an oracle.
This oracle listens to the agreed upon reporting program. At the end of the growing season, depending upon the weather, the oracle signs one of 2 transactions.
Oracles are the cryptocurrencies what the jury is to a court case.
If an oracle were to accept bribes, then no one would use that oracle any more. Oracles are in a competition to be most accurate.
Oracles could be autonomous agents http://en.wikipedia.org/wiki/Autonomous_agent
My research is in building a trust-free cryptocurrency exchange.
Bitstamp is holding hundreds of user’s millions of dollars that they could steal at any time.
It would be better if bitstamp could not steal from its customers.
My plan for trust-free cryptocurrency exchange is to put the cryptocurrencies in to a 2 of 3 address, and from their spend them by sending microtransactions as in example 7: https://en.bitcoin.it/wiki/Contracts
Even if another user tries to steal from you, at worst they can only take a few cents.
Everyone has to give a safety deposit to the host of the exchange, so that if they try to steal the few cents, the host can charge them for the theft.
Unfortunately, none of the professors at my university (UCSB) seem to care about Bitcoin enough to support my research.
Very interesting, I have the same problem at my university cuz my research on the use of artificial intelligence for the prediction of dynamical systems specialy bitcoin as a mainstream cryptocurrencies ,unfortunately at the moment is disapproved.
As larger investors become regulated to trade Bitcoin and other protocols we should see some underlying (over or under) resistance levels and so called quantifiable “fundamental” value. Until larger pass throughs, CFD and lending in Bitcoin become wider spread volatility will remain.
Other coins are starting to get some press, Litecoin, Peercoin and Namecoin for example, this press will open wider spread debate about value transmission, banking costs, overall viability of distributed currency computing and ultimately will validate the idea of Satoshi’s Bitcoin protocal. When the cloud/internet mechanisms reach grass roots humanity and the less connected of our brethren and allow the vast majority of people who currently do not have access to banking or a store of value to now have one I feel that Satoshi’s vision will have taken root.
I do not know about you, but I feel I that seeing the birth of the World Wide Web and the Internet feels different and yet the same.
I look forward to visiting space with Virgin Galactic for sure.
I would say that, besides investigating how secure and reliable the process is (or can be), without some kind of central authority, it would be really hard, if not impossible to regulate.
If we assume by hypothesis that everything works as its supposed to be, it will really mean a way to trade value between individuals without paying taxes to anyone. Without trying to figure out if that’s good or not, I highly doubt it that if “bitcoin do for money what Internet did for communication” will come easy without some kind of strong defense by governments.
Now about my opinion. At the end, we all like to delegate part of our lfe activities to some central authority. Security for instance. People sometimes talk about Anarchy without realizing exactly what it would mean: (~2.000 years back in society time). Avoiding control over value trade by local governments would mean less power and money for them to provide us those services.
My best guess is that Bitcoin represents what NAPSTER did for Music. Changed the industry forever, but as it is, specially in the long term, is not good for the society.
> My best guess is that Bitcoin represents what NAPSTER did for Music.
> Changed the industry forever, but as it is, specially in the long term,
> is not good for the society.
Your post was interesting… until you pulled out the “I know what’s good for society” card…
I even find it unlikely that you understand what Napster “did” to the music industry.
A pity to mar the good beginning.
I’m waiting for the day I can trade bitcoin-settled CFDs on BTC/USD in a decentralized manner on the blockchain. This would (theoretically) allow for a stable store of value, in electronic form, without counterparty risk, and allow users to reap the benefits of Bitcoin without exposing themselves to its volatility.
A typically good post, Ed. I would say that Bitcoin is hot because of the recent run-up in its price against fiat currencies rather than in its value. Value is subjective, and I think its value was enormous when its price against the dollar was still quite low!
Someone has already beaten you to this. It’s called bitshares.