Catastrophe by Design: Destabilizing Wasteful Technologies & the Phase Transition from Proof of Work to Proof of Stake

Theory Tea
Stefanos Leonardos
06-03-2020, 13:00
Αίθουσα Τ203

Cryptocurrency mining in Proof of Work (PoW) blockchains is notorious for its expansive environmental footprint. Environment-friendly alternatives such as Proof of Stake (PoS) protocols have been developed, however, adoption is hindered by entrenched economic interests and network effects. To make matters worse, the committed decentralized nature of these ecosystems is contrary to standard mechanism design approaches that rely on strong persistent centralized authorities with abundant resources that e.g., by using preferential subsidies can effectively dictate system outcomes. What other type of mechanisms are feasible.

In this talk, we develop and analyze a mechanism to induce a transition from PoW to PoS with several desirable properties. The mechanism is transient and does not exogenously favor one technology over another. Instead the phase transition from PoW to PoS emerges endogenously by analyzing a standard evolutionary learning model, Q-learning, where agents trade off exploration and exploitation. Introducing short-term taxation, common for both technologies, encourages exploration and results in irreversible phase transitions and long-lasting stabilization of PoS. At the technical level, our work is based on bifurcation and catastrophe theory, a branch of mathematics that deals with changes in the number and stability properties of equilibria. Critically, our analysis is shown to be structurally robust to significant and even adversarially chosen pertubations of the parameters of both our game and our behavioral model.