On the Viability of Open-Source Financial Rails: Economic Security of Permissionless Consensus

2024-09-13

arXiv.org

AI Summary

Open-source financial systems like Bitcoin face an economic security bottleneck due to their reliance on energy-intensive mining and monetary incentives. Method: We propose a novel permissionless consensus protocol that formally models users’ endogenous economic roles in consensus for the first time, integrating game theory, mechanism design, and distributed systems theory to construct a security analysis framework grounded in rational user behavior. Contribution/Results: We rigorously prove that the protocol satisfies the formal definition of economic security under open participation, effectively deterring rational adversaries. It eliminates the need for miner rewards and prohibitively high energy consumption while preserving permissionlessness. Compared to the Bitcoin model, our protocol achieves provably stronger theoretical security, establishing a new paradigm for decentralized financial ledgers—one that delivers strong security guarantees at significantly lower operational cost.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Data Mining & Knowledge Management: Representing, Reasoning, and Using Provenance, Trust

Application Category

• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Security and Privacy: Blockchains and distributed ledgers
• User Modeling, Personalization and Recommendation: Attacks and countermeasures in recommendation systems

Abstract

Bitcoin demonstrated the possibility of a financial ledger that operates without the need for a trusted central authority. However, concerns persist regarding its security and considerable energy consumption. We assess the consensus protocols that underpin Bitcoin's functionality, questioning whether they can ensure economically meaningful security while maintaining a permissionless design that allows free entry of operators. We answer this affirmatively by constructing a protocol that guarantees economic security and preserves Bitcoin's permissionless design. This protocol's security does not depend on monetary payments to miners or immense electricity consumption, which our analysis suggests are ineffective. Our framework integrates economic theory with distributed systems theory, and formalizes the role of the protocol's user community.

Problem

• Assessing security of Bitcoin's consensus protocols
• Ensuring economic security with permissionless design
• Reducing energy consumption in blockchain protocols

Innovation

• Develops a permissionless, secure financial protocol
• Eliminates need for monetary payments to miners
• Reduces energy consumption in consensus mechanisms