IS4302_lecture 11_Fall 2024 - Game Theory and Governance.pdf

IS4228: Information Technology and Financial Services IS4302 Blockchain and Distributed Ledger Technologies Week 11 © Copyright National University of Singapore. All Rights Reserved. Overview Blockchain Governance Blockchain and game theory...

IS4228: Information Technology and Financial Services IS4302 Blockchain and Distributed Ledger Technologies Week 11 © Copyright National University of Singapore. All Rights Reserved. Overview Blockchain Governance Blockchain and game theory Basics Application 2 Intended Learning Outcomes By the end of this session, students should be able to: Grasp Blockchain Governance: Identify and differentiate governance types—code, developers, and corporate accountability in blockchain. Apply Game Theory: Use key game theory concepts, like Nash equilibrium and the prisoner’s dilemma, within blockchain and consensus systems. Analyze Incentive Mechanisms: Assess roles and incentives for voters and certifiers in decentralized systems. 3 Overview Blockchain Governance Blockchain and game theory Basics Application 4 What is Governance What is Governance? Essentially - “Rights and Responsibilities” of different parties - Who is allowed & obligated to do what - Supervision and Control Mechanisms - What information is visible to whom? - What incentives (rewards, punishments, influence) will ensure actors behave? 5 What is Governance There are several kinds of governance in Crypto Governance… - Of the code: Who programs it, who chooses which code to use? 6 What is Governance There are several kinds of governance in Crypto Governance… - Of the code: Who programs it, who chooses which code to use? - Centralized? (Companies) - Decentralized? (Open Source Developers) - Miners / Validators? 7 What is Governance There are several kinds of governance in Crypto Governance… - Of the coders: Who manages the programmers of a protocol or Dapp? - Are they all under one company, or is it distributed? - “Governance” problems of management: - Backdoors or hacks being introduced - Principal-agent problem - High-value devs leaving, tanking the future value of a project 8 What is Governance There are several kinds of governance in Crypto Governance… - Via the code: How does the code constrain and/or facilitate different behaviors? - Governance tokens that give voting rights - Supervision of decision-makers via peers or 3rd parties - Rewards and punishments built into the code - Monetary, reputational - Supervision necessary… how and by whom? 9 What is Governance There are several kinds of governance in Crypto Governance… - Of the companies: - What legal policies and mechanisms are in place to hold companies accountable? - What influence do users or miners/validators exert on them? - Can token holders exert legal influence over the protocol developers? 10 Blockchain Governance Summary Definition: Governance in blockchain means setting the "who does what" and how it's supervised. Types: Control of code, developer management, code limitations, and company accountability. Goal: Drive compliant behavior and maintain transparency. 11 Overview Blockchain Governance Blockchain and game theory Basics Application 12 Game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Rational: utility/outcome maximization Bounded rationality: limited information, behavioral aspects, etc. 13 Nash equilibrium If each player has chosen a strategy an action plan based on what has happened so far in the game and no one can increase one's own expected payoff by changing one's strategy while the other players keep theirs unchanged, then the current set of strategy choices constitutes a Nash equilibrium. 14 Prisoner’s dilemma 15 Prisoner’s dilemma confess remain silent confess -5, -5 0, -20 remain silent 0, -20 -1, -1 Unique Nash equilibrium: both confess What if they have other consequences from confessing? 16 Finite and Infinite Games Finite Games You might choose to “defect” if you know there is no reputational damage (because the game will end) Infinite Games If there is a chance to keep playing the game only if you have a good reputation, then you have an incentive to keep good behavior. Examples: Exchanges or Gambling websites 17 Multiple equilibria There could be cases where there exist multiple equilibria. E.g., every car goes on the left is an equilibrium, every car goes on the right is another equilibrium E.g., battle of sexes 18 Multiple equilibria What will be the outcome when there are multiple equilibria? Communication Negotiation Culture … 19 Game theory and mining Consensus algorithms In PoW, what is/are the miners’ equilibrium(a)? Lazy mining Selfish mining Filling partial blocks … 20 Game Theory in Blockchain Summary Basics: Models rational strategies, with Nash equilibrium as a stable, unchanging outcome. Finite vs. Infinite Games: Defection common in finite games, cooperation in infinite ones. Application: Used to align miner strategies in consensus models like PoW. 21 Example of a decentralized oracle Example of a decentralized oracle Reference: Adler, John, et al. "Astraea: A decentralized blockchain oracle." 2018 IEEE international conference on internet of things (IThings) and IEEE green computing and communications (GreenCom) and IEEE cyber, physical and social computing (CPSCom) and IEEE smart data (SmartData). IEEE, 2018. 22 System overview Name: ASTRAEA goddess of justice, innocence, purity and precision An oracle that decides the truth value of Boolean propositions Leverages human intelligence through a voting-based game 23 System overview Users of ASTRAEA participate in one (or more) of the following three roles: submitters, voters, and certifiers Submitters choose which propositions enter into the system allocate money to fund (in part) the subsequent effort to validate the Boolean propositions. 24 System overview Voters play a low-risk/low-reward role Once such a player submits a deposit (stake), she is given the chance to vote on a proposition chosen uniformly at random from the ones available The stake is placed before the voter is notified of which proposition she will be voting on. The outcome of the voting process is a function of the sum of the votes weighted by the deposits. The maximum voting deposit is a parameter of the system. 25 System overview 26 System overview Certifiers play a high-risk/high-reward role choose an available proposition and place a large deposit in order to certify it as either true or false The certification outcome is a function of the sum of certifications weighted by the deposits. 27 System overview 28 Parameters Setting the parameters appropriately is important for the functionality of the system. The maximum voting deposit size should be small relative to the total voting stake on each proposition. If a single vote can account for 100% of a proposition’s total voting stake, an adversary can have total control over the outcome of a randomly drawn proposition. Conversely, if it is 1%, the adversary would somehow need to draw the same proposition repeatedly to control its validity outcome. 29 Parameters The minimum certification deposit should be large enough that certifiers incur sufficient risk. Otherwise, they may be tempted to abuse their certifications for griefing purposes as a malicious certification can impact reward payouts for other players. individual certifiers have enormous influence on the process for individual propositions the certifiers alone cannot force the oracle to produce an incorrect value and they are encouraged to behave honestly by the incentive structure; otherwise they face large penalties. 30 The proposition list There exists a set of propositions constructed outside of ASTRAEA called the proposition list, which is denoted by P and is of fixed size |P|. Each proposition pi ∈ P has a hidden truth value ti and is associated with a bounty amount Bi The voting game is played over all propositions in P simultaneously. Two certifier reward pools containing RT and RF monetary units, intended to reward certifiers for true and false outcomes, respectively. 31 Overview of ASTRAEA 32 Voting Players may place a deposit in order to vote on a randomly- chosen proposition. First, the voter i indicates a desire to stake an amount of money si,r,v ≤ smax on a vote for proposition pr, where r is not yet known to the voter. Subsequently, the system chooses the value for r and sends it to the voter. r is chosen uniformly at random from [1, |P|] a voter may be given the opportunity to vote on the same proposition more than once. Finally, the voter submits a sealed vote v ∈ {T, F}. This can be accomplished using a commit-reveal scheme in which the voter commits to a hash of their vote concatenated with a nonce and later reveals the vote and nonce. 33 Certifying, termination, and decision Players may place a large deposit in order to certify propositions of their choosing. The certifier simply submits a monetary stake σi,j,c ≥ σmax and a sealed certification c ∈ {T, F} for proposition pj. Once a proposition has accumulated sufficient voting stake, it is decided. Maybe supermajority better? 34 Outcomes of the game Determine rewards Oracle output not necessarily same with game outcome The oracle is not restricted to an output of {T, F,Ø}, but could instead have an output in the range [0, 1] indicating confidence in the truth or falsity of the proposition. 35 Rewards and penalties 36 Monetary flows Submitter fees are used to fund bounties, while the certifier reward pools are initially left empty. Certifier reward pools are funded by unclaimed bounties and penalties. It is expected that this method will approach equilibrium where reward pools and bounties are balanced to provide reasonable incentives for both voters and certifiers. It is adaptable as it can approach a new equilibrium automatically if external conditions change. 37 Monetary flows Each time a proposition is decided with voting outcome T, an amount RT/τ is subtracted from RT. If the certification outcome is also T , the funds are used to pay out certifier rewards. Otherwise, the funds are added to RF. A symmetric case applies for false outcomes. It ensures that the reward pools encourage certifiers to certify equal numbers of true and false propositions Discourage voters from voting with constant T or F values in order to maximize profit without considering the actual propositions. 38 Voting Outcomes and Manipulation Dv: amount of votes needed for a decision |P|: number of propositions in the list q: accuracy of honest voters n/(|P|*Dv): proportion of votes from adversary 39 Potential applications Data Availability Machine Learning and Data Annotation Adjudication Mechanisms 40 Game theory and decentralized oracles In ASTREA, there are two sets of participants: voters and certifiers. When the voters and certifiers’ voting results agree with each other, both will be awarded. Otherwise, the voters will break even and the certifiers will be penalized. How will they vote? Formal game theoretic analysis is needed there. 41 Summary of ASTRAEA Decentralized Oracle (ASTRAEA) Purpose: Determine truth values using a decentralized voting model. Roles: Submitters: Propose and fund questions. Voters: Stake small amounts to vote. Certifiers: High-risk, high-reward certification for propositions. Mechanics: Rewards alignment, penalizes misalignment between voter and certifier results. 42 Thank you! Please submit your course evaluation! Feedback is how I can improve, and if you enjoyed this course or have any suggestions for the future I would love to incorporate them. Thank you for the amazing class. 43