Pricing ASICs for Cryptocurrency Mining

Cryptocurrencies that are based on Proof-of-Work often rely on special purpose hardware (ASICs) to perform mining operations that secure the system. We argue that ASICs have been mispriced by miners and sellers that only consider their expected returns, and that in fact mining hardware should be treated as a bundle of \emph{financial options}, that when exercised, convert electricity to virtual coins. We provide a method of pricing ASICs based on this insight, and compare the prices we derive to actual market prices. Contrary to the widespread belief that ASICs are worth less if the cryptocurrency is highly volatile, we show the opposite effect: volatility significantly increases value. Thus, if a coin's volatility decreases, some miners may leave, affecting security. To prevent this, we suggest a new reward mechanism. Finally we construct a portfolio of coins and bonds that provides returns imitating an ASIC, and evaluate its behavior: historically, realized revenues of such portfolios have significantly outperformed ASICs, showing that indeed there is a mispricing of hardware, and offering an alternative investment route for would-be miners.Comment: 13 pages, 10 figures, 3 table

An Axiomatic Approach to Routing

Information delivery in a network of agents is a key issue for large, complex systems that need to do so in a predictable, efficient manner. The delivery of information in such multi-agent systems is typically implemented through routing protocols that determine how information flows through the network. Different routing protocols exist each with its own benefits, but it is generally unclear which properties can be successfully combined within a given algorithm. We approach this problem from the axiomatic point of view, i.e., we try to establish what are the properties we would seek to see in such a system, and examine the different properties which uniquely define common routing algorithms used today. We examine several desirable properties, such as robustness, which ensures adding nodes and edges does not change the routing in a radical, unpredictable ways; and properties that depend on the operating environment, such as an "economic model", where nodes choose their paths based on the cost they are charged to pass information to the next node. We proceed to fully characterize minimal spanning tree, shortest path, and weakest link routing algorithms, showing a tight set of axioms for each.Comment: In Proceedings TARK 2015, arXiv:1606.0729

Redesigning Bitcoin's fee market

The security of the Bitcoin system is based on having a large amount of computational power in the hands of honest miners. Such miners are incentivized to join the system and validate transactions by the payments issued by the protocol to anyone who creates blocks. As new bitcoins creation rate decreases (halving every 4 years), the revenue derived from transaction fees start to have an increasingly important role. We argue that Bitcoin's current fee market does not extract revenue well when blocks are not congested. This effect has implications for the scalability debate: revenue from transaction fees may decrease if block size is increased. The current mechanism is a "pay your bid" auction in which included transactions pay the amount they suggested. We propose two alternative auction mechanisms: The Monopolistic Price Mechanism, and the Random Sampling Optimal Price Mechanism (due to Goldberg et al.). In the monopolistic price mechanism, the miner chooses the number of accepted transactions in the block, and all transactions pay exactly the smallest bid included in the block. The mechanism thus sets the block size dynamically (up to a bound required for fast block propagation and other security concerns). We show, using analysis and simulations, that this mechanism extracts revenue better from users, and that it is nearly incentive compatible: the profit due to strategic bidding relative to honest biding decreases as the number of bidders grows. Users can then simply set their bids truthfully to exactly the amount they are willing to pay to transact, and do not need to utilize fee estimate mechanisms, do not resort to bid shading and do not need to adjust transaction fees (via replace-by-fee mechanisms) if the mempool grows. We discuss these and other properties of our mechanisms, and explore various desired properties of fee market mechanisms for crypto-currencies

How to Charge Lightning: The Economics of Bitcoin Transaction Channels

Off-chain transaction channels represent one of the leading techniques to scale the transaction throughput in cryptocurrencies. However, the economic effect of transaction channels on the system has not been explored much until now. We study the economics of Bitcoin transaction channels, and present a framework for an economic analysis of the lightning network and its effect on transaction fees on the blockchain. Our framework allows us to reason about different patterns of demand for transactions and different topologies of the lightning network, and to derive the resulting fees for transacting both on and off the blockchain. Our initial results indicate that while the lightning network does allow for a substantially higher number of transactions to pass through the system, it does not necessarily provide higher fees to miners, and as a result may in fact lead to lower participation in mining within the system.Comment: An earlier version of the paper was presented at Scaling Bitcoin 201

The Strategic Justification for BGP

The Internet consists of many administrative domains, or \emph{Autonomous Systems} (ASes), each owned by an economic entity (Microsoft, AT\&T, The Hebrew University, etc.). The task of ensuring interconnectivity between ASes, known as \emph{interdomain routing}, is currently handled by the \emph{Border Gateway Protocol} (BGP). ASes are self-interested and might be willing to manipulate BGP for their benefit. In this paper we present the strategic justification for using BGP for interdomain routing in today's Internet: We show that, in the realistic Gao-Rexford setting, BGP is immune to almost all forms of rational manipulation by ASes, and can easily be made immune to all such manipulations. The Gao-Rexford setting is said to accurately depict the current commercial relations between ASes in the Internet. Formally, we prove that a slight modification of BGP is incentive-compatible in \emph{ex-post Nash equilibrium}. Moreover, we show that, if a certain reasonable condition holds, then this slightly modified BGP is also \emph{collusion-proof} in ex-post Nash -- i.e., immune to rational manipulations even by \emph{coalitions} of \emph{any} size. Unlike previous works on achieving incentive-compatibility in interdomain routing, our results \emph{do not require any monetary transfer between ASes} (as is the case in practice). We also strengthen the Gao-Rexford constraints by proving that one of the three constraints can actually be enforced by the rationality of ASes if the two other constraints hold.Networks; Ex post Nash; Routing; rational manipulation; Border Gateway Protocol; Dispute Wheel

Interdomain routing and games

We present a game-theoretic model that captures many of the intricacies of \emph{interdomain routing} in today's Internet. In this model, the strategic agents are source nodes located on a network, who aim to send traffic to a unique destination node. The interaction between the agents is dynamic and complex -- asynchronous, sequential, and based on partial information. Best-reply dynamics in this model capture crucial aspects of the only interdomain routing protocol de facto, namely the Border Gateway Protocol (BGP). We study complexity and incentive-related issues in this model. Our main results are showing that in realistic and well-studied settings, BGP is incentive-compatible. I.e., not only does myopic behaviour of all players \emph{converge} to a ``stable'' routing outcome, but no player has motivation to unilaterally deviate from the protocol. Moreover, we show that even \emph{coalitions} of players of \emph{any} size cannot improve their routing outcomes by collaborating. Unlike the vast majority of works in mechanism design, our results do not require any monetary transfers (to or by the agents).Interdomain Routing; Network Games; BGP protocol;