Presentation of a seminar talk at ETH aimed at bringing participants to understand how tightly connected systems lead to networked risks, and why this can imply systems we do not understand and cannot control well, thereby causing systemic risks and extreme events.

1. Computational Social Science, Fall 2019
Blockchain in Practice
Jochen Krause and Rafael Kallis

2. content
bitcoin
miner incentives
tx fee mechanics
attacks
scalability problems
off-chain solutions
the future of work
teamwork
collaboration
contribution
collusion
covee network

3. blockchain
infrastructure

4. bitcoin
1
Digital currency running on a peer-to-peer
network architecture.
Every node is equal, no special nodes, no
hierarchies. Resilient, decentralized and
open.
2
Miners validate transactions and record
them on the blockchain.
For creating new blocks, miners are
compensated by receiving rewards. Miners
compete against each other to create new
blocks.
3
First miner to solve a cryptographic
problem, so called Proof-of-Work (PoW),
wins the right to create a new block and
receives a reward.
PoW problem must be hard to solve but
easy to verify.
4
Difficulty of problem is picked such that a
solution is found among all miners every 10
minutes.
Difficulty is adjusted over time to account
for increase or decrease of miners.
Antonopoulos, bitcoinbook.info

5. mining incentives
block + tx rewards
For creating new blocks, miners receive a fixed block reward
and fees included in the block’s transactions.
Blocks accomodate a finite number of transactions, Miners
prefer transactions with higher fees.
The block reward is also bitcoin’s issuance mechanism.
Bitcoin issuance rate halves (approx.) every 4 years.
(per 24h)
Antonopoulos, bitcoinbook.info

6. There has been an implicit belief that whether miners are
paid by block rewards or transaction fees does not affect the
security of the blockchain.
With only transaction fees, the variance of the block reward
is very high due to the exponentially distributed block arrival
time, and it becomes attractive to fork a “wealthy” block to
“steal” the rewards therein.
PettyCompliant strategy: if there is a 1-blockfork, it is more
profitable for the next miner to break the tie by extending the
block that leaves the most available transaction fees rather
than the oldest-seen block.
block reward halving
the undercutting attack
On the Instability of Bitcoin Without the Block Reward, Carlsten et al. (2016)
One possible state of the blockchain, two possible
actions a miner could take.
Carlsten, Miles, et al. (2016)

7. alternative miner incentive schemes
required processing fee
Not all tx result in a profit but miners still have
to process all tx. Introduce fee reserve price,
fixed or relative to tx value.
lost coins and gold dust
Recirculate “inactive” coins from loss of private
keys or small-value coins in form of additional
reward to block mining.
discontinue block reward halving
Makes bitcoin inflationary, miners always have
an incentive, increases bitcoin security as it is a
countermeasure against undercutting attack.
Going Beyond the Coinbase Transaction Fee: Alternative Reward Schemes for Miners in Blockchain Systems, Gjermundrød et al. (2016)

8. Conventional wisdom asserts that the protocol is secure
against colluding minority groups.
Colluding miners are able to obtain a revenue larger than
their fair share by following the selfish-mining strategy.
Strategic revealing of blocks with the objective of “wasting”
the honest majority’s computational resources on blocks that
are not destined to be part of the blockchain.
Rational miners will prefer to join selfish miners therefore
increasing the colluding group in size until it becomes a
majority.
mining pools
the selfish mining attack
Majority is not Enough: Bitcoin Mining is Vulnerable, Eyal et al. (2013)

9. transaction fees
market mechanics
Bitcoin uses a mechanism that is equivalent to a first-price
auction: what you bid is what you pay.
No simple strategy for choosing the optimal bid price.
Uniform price auction as an alternative: optimal strategy is to
bid whatever your valuation is. Problems?
1. Add self transactions to increase clearing price.
2. Miner bribes transaction senders to increase bids.
3. Less miner revenue?
Block Transactions
ethresear.ch/t/first-and-second-price-auctions-and-improved-transaction-fee-markets/2410
price

10. raising tx fees
New block every 10 minutes, finite transactions per block.
Bitcoin can handle 3.3 ~ 7 transactions per second (estimated).
Transaction fees spike during times of high network activity.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
20
40
60
80
100
Trend 01 Trend 02
$34
bitinfocharts.com/comparison/bitcoin-median_transaction_fee

11. scalability problem
With such limited transactional throughput, Bitcoin is
not ready for mass-adoption. Various strategies have
been proposed to increase Bitcoin’s transaction
processing capacity:
01 | increase block size
02 | decrease block time
03 | off-chain solutions
04 | sidechains

12. the
blockchain
trilemma
jeffersoncapital.info/the-scalability-trilemma/

13. Trustless mechanism for exchanging bitcoin transactions
between two parties, outside of the bitcoin blockchain.
3-step process: funding, commitments and settlement.
Funding and settlement is on-chain, commitments off-chain.
Point-to-point transactions with low settlement latency, high
transactional throughput and low cost.
off-chain solutions
payment channels
Antonopoulos, bitcoinbook.info

14. Network of routed, bidirectional payment channels. Allows to
route payments from channel to channel without trusting any
of the intermediaries.
Participants charge a fee for using their payment channel.
In practise incentives are not high enough. Many nodes
operate at cost, whilst locking millions of BTC.
Several alternatives exist with greater profitability.
off-chain solutions
lightning network
Antonopoulos, bitcoinbook.info

15. Autonomous blockchains that interconnect.
Allow btc to be transferred between the main chain to the
secondary chain.
Under the hood, no btc is transferred but instead temporarily
locked on the main chain while the same amount of
equivalent tokens are unlocked in the secondary chain.
sidechains
interoperable chains
blockstream.com/sidechains.pdf
nichanank.com/blog/2018/8/26/sidechains-scalability-a-closer-look-at-rootstock-rsk

16. beyond bitcoin
ethereum
Smart contracts, turing completeness, allows
arbitrary complex applications to be built on
top called “Decentralized Apps”.
eos
Regime of “best” 21 miners, near instant
transaction finality, no block reward halving,
no* transaction fees.
iota
Made for IoT devices, directed acyclic graph of
transactions, to issue a transaction users must
work to approve other transactions.

17. The Covee Case

18. A decentralized platform for knowledge work
The future of work runs on smart contracts
- without a centralized middlemen.

19. Blockchains are...
1. Incentive Machines
(incentivising behaviour & rule enforcement via code instead of intermediary)
2. Public Utility Networks
(permissionless infrastructure at lowest MC)

20. Government controlled,
bank intermediated
Money
Pillars of the decentralized economy
Individual sovereignty
over my money
Government owned
and controlled
Individual sovereignty
over my identity
Controlled and
monopolized
by corporations
Individual sovereignty
over my value creation
Work
(value creation)
Identity
Today 2030

21. Why is work (value creation) still stuck within corporations?
Scale
Effectiveness
Traditional
organisations
1st gen freelancing /
crowdsourcing platforms

22. Because decentralised collaboration is very tricky without firm + legal structures
(incentives in teams / free-riding, performance attribution, coordination, contracting)
Data science project Software development Animation video production
Domain
expert
Data
engineer
CoderStatistician
Product
manager
UX/UI
Designer
Front-end
developer
Back-end
developer
Storyline
writer
Narrator
Motion designer

23. Can Blockchain based / programmable incentives replace traditional work flows?
Incentive alignment
(“skin in the game” mechanism)
Performance attribution
(Consensus mechanism)
Reputation mechanism

25. “Show me the incentive
and I will show you the outcome.”
Charlie Munger

26. Work 3.0 - For whom will we work in the future?
Centralized
Artificial Intelligence
A person Simple algorithms Complex algorithms
Decentralized
transparent
smart contracts
Your boss:
2015 20302000
Corporations Platforms
Who will control, own and benefit from the algorithms that
coordinate & reward human work in 2030?

27. White Paper: Formal proofs and further details of mechanisms
● Authors: Marcel Dietsch, PhD (Oxford) Jochen Krause, PhD (Zurich) Heinrich Nax, PhD (Oxford)
Joan Omeru, PhD (Imperial College) Raphael Schoettler, PhD (Humboldt, Berlin) Sven Seuken, PhD (Harvard)
● Advice & review: Alvin Roth, 2012 Nobel Laureate in Economics and Covee Network Senior Advisor

28. Fair compensation scheme in a team
● You are a member of a team
○ Your team works together to achieve certain goals
○ Every member of the team shall receive a fair share of the overall
compensation for the team
● What is a fair split?
○ Decentralized approach: The team decides.
● What is the appropriate method to find a fair split?
○ Market design with incentives set in the right way. (Heinrich, Sven, Alvin)
● What might be a problem?
○ Collusion, uninformed team mates,

29. Incentive Design developed with leading Academics (incl. Nobel Prize Winner Alvin Roth)
Protocol specification (40 page White Paper) Protocol source code
https://covee.network/assets/covee-whitepaper.pdf https://github.com/CoveeNetwork/protocol

30. Knowledge work is teamwork
Data science project Software development Animation video production
Domain
expert
Data
engineer
CoderStatistician
Product
manager
UX/UI
Designer
Front-end
developer
Back-end
developer
Storyline
writer
Narrator
Motion designer

31. Network
DecentralizedCentralized
Traditional
organization
Governance
Decentralized & scalable information networks: the future of knowledge work
Scale

32. Mechanism Design: Scaling teamwork globally while decentralizing governance

33. Liberating knowledge workers from the boundaries of the firm
● Knowledge work: location-independent, global, zero marginal cost of digital information
● But crowdsourcing & freelancing platforms have not disrupted incumbents
● Because: high-value projects require coordination and contracting
● Blockchain-based smart contracts now solve these problems
○ coordinating human collaboration globally - beyond firm boundaries
○ contracting without trusted intermediaries - enabling new kinds of value exchanges
○ achieving transparency and auditability - smart contracts are public so everyone can
verify that it implements the functionality claimed by its creator
Domain experts, data scientists, software
engineers, people with STEM qualifications +10m new STEM graduates every year
>50m potential users

34. Use case example: Machine learning for cancer diagnostics (Radiomics)
Team has an external client (e.g. a science lab or a commercial company)
● Value of collaboration on Covee for client: cost-efficiency and wider access to talent
● Value of collaboration on Covee for team:
○ access to larger pool of potential teammates than in any other context
○ no need to join a regular organization
○ getting paid by the client
Contribution
to team
Clinician 10%
Radiologist / Radiation oncologist 30%
Data scientist 25%
Biostatistician 25%
Database, IT and Documentation 10%

35. Covee’s Cryptographic Token XCV - deployed on Ethereum testnet

36. Covee’s UI: Intuitive and frictionless interaction with the blockchain
● Intuitive user experience
● Frictionless integration of our smart contracts and token
● Communicating our mechanisms clearly while masking their complexity
Watch
Screencast
Demo

37. Where can this be applied?
Work Marketplace
Prof. Heinrich Nax (dvsn.app)Covee Network (beta)
Team Collaboration Tool
Covee Network 2.0

38. Let the data speak.

39. DVSN
The idea for this website came after digesting the article Impartial division of a dollar by Geoffroy De
Clippel, Herve Moulin and Nicolaus Tideman (JET 2008). Herve Moulin was my PhD examiner so I have
followed his work for a number of years and always enjoyed it. The mechanism presented in that article I
found particularly ingenious and I have started to use it to split marks of group projects in my courses, and
several colleagues have started using it too. Sven Seuken (special thanks to him!) and myself adapted it for
a blockchain startup company too (the mechanism working better than the blockchain technology). There
is a second (less mathy) paper by Nicolaus Tideman and Florenz Plassmann on the same mechanism which
presents some more details.
In sum, the said mechanism proposes a way to split gains of a joint project on the basis of peer-review, with
the key feature that one does not express how much one thinks one did oneself, and that one’s own review
of the others does not change how much one gets. Instead, one reviews the other group members’
performances in terms of percentages toward doing “the rest” (i.e. what one did not do).

40. Thank you