By Moshe Babaioff, Shahar Dobzinski, Sigal Oren, and Aviv Zohar
Abstract: Many large decentralized systems rely on information propagation to ensure their proper function. We examine a common scenario in which only participants that are aware of the information can compete for some reward, and thus informed participants have an incentive {\em not} to propagate information to others. One recent example in which such tension arises is the 2009 DARPA Network Challenge (finding red balloons). We focus on another prominent example: Bitcoin, a decentralized electronic currency system. Bitcoin represents a radical new approach to monetary systems. It has been getting a large amount of public attention over the last year, both in policy discussions and in the popular press. Its cryptographic fundamentals have largely held up even as its usage has become increasingly widespread. We find, however, that it exhibits a fundamental problem of a different nature, based on how its incentives are structured. We propose a modification to the protocol that can eliminate this problem. Bitcoin relies on a peer-to-peer network to track transactions that are performed with the currency. For this purpose, every transaction a node learns about should be transmitted to its neighbors in the network. As the protocol is currently defined and implemented, it does not provide an incentive for nodes to broadcast transactions they are aware of. In fact, it provides an incentive not to do so. Our solution is to augment the protocol with a scheme that rewards information propagation. Since clones are easy to create in the Bitcoin system, an important feature of our scheme is Sybil-proofness. We show that our proposed scheme succeeds in setting the correct incentives, that it is Sybil-proof, and that it requires only a small payment overhead, all this is achieved with iterated elimination of dominated strategies. We complement this result by showing that there are no reward schemes in which information propagation and no self-cloning is a dominant strategy. You can find the paper at: http://arxiv.org/abs/1111.2626, http://research.microsoft.com/apps/pubs/?id=156072 A short description appeared at ACM SIGecom Exchanges : http://www.sigecom.org/exchanges/volume_10/3/BABAIOFF.pdf Bio: Moshe Babaioff is a Researcher at Microsoft Research, Silicon Valley (Mountain View, California). Prior to joining Microsoft Research at 2007, he spent two years as a post-doctoral scholar at the University of California, Berkeley. He received his PhD in Computer Science from the Hebrew University in Jerusalem at 2005, where he was advised by Professor Noam Nisan. He holds a M.Sc. in Computer Science and a B.A. in Mathematics and Computer Science, also from the Hebrew University. His research interests lie on the border of Computer Science Theory, Game Theory, and Microeconomic Theory. In particular, he is interested in the theoretical foundations of market design.