Blockchain consensus mechanisms and the role of game theory
From cryptoeconomics to the double-spending solution
IN SUMMARY: What is a consensus mechanism? What the does game theory plays a in blockchain? What are the main characteristics of a good consensus mechanism? Blockchain as a catalyst for profund social change?
In March 2022, the European Union Parliament backtracked on its plan to phase out energy-intensive cryptocurrencies by rejecting the proposed law banning proof-of-work within its territorial limits.
And what no longer seems to be an issue in Europe is now being considered by New York State, which, through a legislative proposal, has proposed creating a two-year moratorium on mining operations unless 100% of their energy comes from renewable sources.
Along these lines, the campaign for "green blockchains" is intensifying, a concept that arose from the debate about electricity consumption and carbon emissions caused by Bitcoin mining, especially in light of the recent ESG movement.
Also in March, the Environmental Working Group of Greenpeace USA and other environmental groups started the ‘Change the Code, Not the Climate” campaign, which seeks to pressure those who defend Bitcoin mining through marketing actions.
In response, Blockstream’s co-founder and CEO, British cryptographer Adam Back, Jack Dorsey of Block, formerly Square, announced in April de 2022 that they are breaking ground on a solar and battery-powered Bitcoin miner in Texas using Tesla’s solar and storage technology.
Alongside this, there was a big buzz about the Merge, which introduced proof-of-stake to the Ethereum blockchain.
But do you know what’s at stake in all these moves?
What is consensus?
Consensus is a concept that describes an agreement produced by consent between all the members of a group or between several groups.
Note that consensus differs from a majority, because for there to be a majority there must be a minority that disagrees, while in consensus, by definition, there is no disagreement.
To understand this better, think of the presidential elections, where whoever is elected needs the vote to reach a majority, disregarding the feelings and well-being of the minority. On the other hand, a consensus ensures that voters reach an agreement that benefits the group as a whole.
Have you ever thought about the value of reaching consensus in a polarized society? Isn’t it unity and trust that make great nations thrive?
Blockchain as a catalyst for profound social change.
Blockchain, which most people know as the technology that makes cryptocurrency transactions possible, is gradually taking on a new role: that of bringing about, for the first time, a change in the ownership of those who confer trust on business relationships, making it possible for new business models and markets to emerge.
Its architecture is capable of removing a portion of the power that used to go to intermediaries and trust validators, transferring it to the people who actually take part in a given transaction validated on a blockchain.
In other words, blockchain technology allows direct interaction between strangers, or people who don’t know each other, in a distributed network and without the need for a traditional validator of trust (such as corporations, institutions), eliminating uncertainty and introducing a new way of conferring trust on human interactions.
In this context, blockchain technology is a catalyst for profound social change, because for the first time in history, people can interact directly, and in real time, without the need for intermediaries.
What role does game theory play in a blockchain?
Consensus mechanisms, also known as game theory, are the basis of all blockchains.
But to understand this better, let’s take a step back and understand why blockchain is known as "the trust machine".
Trust is a fundamental part of any society, as it is a prerequisite for any relationship between individuals to take place.
In this step, trust can be obtained in two ways:
- Through intermediaries who, through a legal contract, guarantee trust in the relationships between two parties in a centralized system;
- Through mathematics which, through consensus algorithms, guarantees trust in relationships between two parties on a blockchain.
As blockchains "intent" to be decentralized, trust must come from the algorithmic. That is, trust in a blockchain network is achieved by consensus algorithms (machine, software code) such as Bitcoin’s proof-of-work (mining), and Ethereum’s proof-of-stake. We’ll talk about the types of consensus mechanism in another article.
Without consensus algorithms, all we would have is a decentralized network that is ignorant, prone to fraud, and unable to guarantee the security and immutability of the transactions recorded on it.
This is why the blockchain only emerged when Satoshi Nakamoto created the Bitcoin blockchain. There were no blockchains before 2008, because the idea of adding a consensus algorithm to cryptography and distributed networks only emerged with the father of Bitcoin.
Only Bitcoin’s blockchain made it possible for strangers, or people who don’t trust each other, to interact directly without the need for an intermediary or a central authority to confer trust.
This is why consensus algorithms are the basis of any blockchain and DAGs, because they solve the problem that only a true blockchain can solve: double spending, also known as the “Byzantine generals’ problem”.
Game theory: from cryptoeconomics to the double-spending solution
It is the consensus algorithm that, on blockchain platforms formed by decentralized networks, defines the rules for devices spread all over the world to reach an agreement (consensus), making it possible for a network without intermediaries to function without fraud, and without being corrupted.
Consensus is achieved when enough devices agree on what is true and what should be recorded on a blockchain.
Therefore, consensus algorithms (also known as game theory) are the set of rules that describe how communication and data transmission works between electronic devices (nodes) participating in a blockchain network.
It was the implementation of the consensus algorithm known as proof-of-work (mining) that made a new field of economic coordination possible: Cryptoeconomics.
Cryptoeconomics is a new field of knowledge that brings together economics and computer science to study the decentralized markets and applications that can be built by combining cryptography with economic incentives.
It’s an economic incentive that ensures that validators on a blockchain network like bitcoin behave in favor of security and try to hack, defraud or corrupt the system by double-spending.
One of the biggest problems in computing, double-spending is the risk of a digital currency being duplicated and used on more than one occasion. This is an attack that can affect distributed networks due to their decentralized nature.
Just as fiat money (real, dollar, pound, euro) is exposed to counterfeit notes, digital currencies were prone to this fraudulent act and therefore required an intermediary to validate transactions on the Internet.
It is the economic incentives implemented by consensus algorithms that motivate participants to act in the interests of the blockchain network, rather than their own self-interest.
Consensus mechanisms set the rules that economically incentivize the participants of a blockchain platform to verify transactions and reach an agreement (consensus) on what is true and should be recorded on a distributed network.
Along these lines, the proof of work (mining) of the Bitcoin blockchain is the first consensus algorithm that has solved the double expense, making it possible to transfer value in digital form without an intermediary; introducing a reliable network into a decentralized system, cryptographically protecting data and minimizing the risk of fraud.
On the Bitcoin blockchain, encrypted transaction assertions are delivered by miners via the PoW consensus mechanism. This system effectively combats double-spending to this day, without ever having been hacked, allowing secure peer-to-peer digital payments.
This is why to this day there are no counterfeit bitcoins in circulation, as Dan Held rightly points out.
What are the main characteristics of a good consensus mechanism?
For a consensus protocol to successfully bring trust to a blockchain platform, it must have five basic characteristics:
- agreement,
- collaboration,
- cooperation,
- equality,
- inclusion and
- active participation.
A consensus mechanism should bring as much agreement to a blockchain network as possible.
All participants should seek to work collaboratively (together) to achieve an outcome that puts the best interests of a blockchain network first.
All participants should not put their own interests first, but rather work cooperatively (as a team) rather than individually.
In this respect, a blockchain network must be premised on equality. That is, the participants must be as equal as possible. This basically means that each vote must have equal importance and weighting, and one validator in a blockchain network cannot have more importance than another.
In addition, a consensus mechanism needs to be inclusive. As many participants as possible should be involved in the consensus process, and they need to be sure that their collaboration makes a difference in achieving consensus in the long run.
Finally, the design of the consensus mechanism must encourage the active participation of everyone in the consensus process.
There is no point in replacing one consensus algorithm with another without considering all these factors.
If the consensus mechanism doesn’t have any of the characteristics we’ve just seen, the blockchain will fail, because they’re not secure enough. In short, they can’t solve the problem of double spending.
Possibilities
Do you think that a consensus algorithm, which requires high energy consumption, should change its code, as suggested by the Change the Code campaign? Or is it enough to use renewable energy sources that don’t pollute the environment?
Is it only people concerned about the environment who are against bitcoin mining, or is there also interest from intermediaries who will be replaced by blockchain technology?
What if they had banned electricity in 1888 because of what became known as the chain wars — a series of events surrounding the introduction of electricity transmission systems that caused fatalities caused by high-voltage lines, attributed by the media to the greed and insensitivity of the lighting companies of the time. Would we still be using candles?
Have you considered why the European Parliament backed down and didn’t follow through with the ban on the use of proof of work?
Sharing knowledge creates prosperity! I hope to see you soon!
👉🏼 If you like my content, leave your 👍, share ♻️ with your friends.
🔔 Subscribe to my page if you don’t want to miss any posts/articles.
