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Ethereum’s Vitalik Buterin Emphasizes Importance of ‘Punishment’ in Cryptocurrency

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EDCON, an annual developer event for the Ethereum network, was started off by none other than Vitalik Buterin, the blockchain platform’s leading scientist on February 17. Buterin presented an “Introduction to Cryptoeconomics” where various topics were discussed, and issues with regards to incentives and rewards for the cryptocurrency.

Using Bitcoin as an example, Buterin states that to change from a system which is only used to see how much money everyone has, penalties for actions must also be introduced, which is easier said than done.

Many problems plague Bitcoin mining with its reward-only based system. Buterin talks about these issues, which include selfish mining. Selfish mining can discriminate against certain transactions from being broadcasted to the Bitcoin network, a form of censorship.

Bitcoin was designed to where if a user sends a transaction with a relatively high fee, there is an expectation for it to be confirmed fairly quickly. In Bitcoin’s current network state, that has not been the case as recent events have shown.

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“A block that doesn't get into the chain gets nothing and there so rewards are marginally around zero-sum. If you can make people get less money, then that translates into you getting more money. This is in some ways the source of the selfish mining attack."

Buterin suggests combating selfish mining with two possible implementations, the use of tokens and privileges. Use of tokens is a more commonly discussed and known concept, where they are assigned to participants in the network. Good actions would increase the balance of one, while penalties would result in token deletion and a decreasing balance.

The less talked about the type of incentive is privileges, where participants are given decision-making rights, which are revoked if used maliciously. For example, if there is space left over in a block for more transactions, a selected participant could choose which additional transactions would be included in the block. This creates an additional source of revenue, incentivizing good actors as well as creating an efficient market model for transactions simultaneously.

Malicious participants could have their privileges revoked, and not be able to create blocks or approve transactions anymore, missing out on potential revenue.

While both are good concepts that could be applied in cryptocurrencies to combat selfish mining, finding a way to objectively isolate both good and bad participants and handle them accordingly is much harder.

It may be difficult to unambiguously prove that a certain actor has malicious intent and penalties may resort to a group of actors, some of which may have not acted out of line. Finding the right balance of severity of rewards and punishment is also something that must be implemented correctly.

Regardless, the above topics are important for Ethereum’s network, especially when it departs from Proof of Work.