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Jeffrey Carter's avatar

My friend asked ChatGPT to summarize the paper. This is the result:

"Satoshi Nakamoto (2008) introduced a new economic system that operates without government support or legal enforcement. Instead, trust and security come from cryptography and financial incentives, all within an anonymous, decentralized network. This paper argues that while Nakamoto’s approach to trust is clever, it has significant economic limitations. The main idea is based on three equations:

1. The cost of maintaining honest participation (like mining or staking) must be high.

2. The system needs to be secure against majority attacks (the main weakness of decentralized systems).

Together, these factors mean that the ongoing cost of securing the blockchain is always high compared to the potential rewards for attacking it. This makes it much more expensive than traditional trust systems and, if scaled globally, could cost more than the entire world's GDP. Nakamoto’s system would be more viable if attackers also lost their initial investment, but this would either require the system to collapse or rely on outside legal support. The key difference between Nakamoto's system and traditional trust is that traditional systems can scale more efficiently, spreading the cost of trust over many transactions, while Nakamoto’s system has high ongoing costs."

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Jay's avatar

Well, yes. That is the problem of "proof of work".

POW is based on the idea that it would be computationally infeasible for an attacker to calculate more hashes than the rest of the network combined can calculate. It's horribly inefficient and it's mostly fair to say the inefficiency is the point. They're hoping to make it so horribly inefficient that no attacker could ever pay the cost.

Of course, like you say, for enough money, you absolutely can pay the costs.

There is some interesting game theory at work on both sides. You can imagine you are a super hacker with a magic computer that can instantly crack the blockchain challenges. So you hack it and give yourself all the bitcoin. Now what? Who accept bitcoin from you knowing you could do it again any time?

A successful attack makes what you are stealing worthless. A (not really) paradox that will send philosophy majors into an infinite loop.

Proof-of-Stake solves all this in a much tidier form, although the current algorithms implementing it leave a lot to be desired. Stakeholders can easily "steal" all the money, but they have a game-theory interest in not doing that, because it would render their own stake worthless.

The beauty of the free market. In the Adam Smith sense (" is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest"). And the Milton Friedman one ("the important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. ")

Economics, at it's best, is a study all about aligning incentives.

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