Capitalizing on a Nash Equilibrium to Significantly Reduce Energy Consumption in Blockchain
Just a few days ago, Ethereum executed an upgrade to its infrastructure and merged into a more energy-efficient system for validating transactions. For the past several years since its inception in 2013, the Ethereum blockchain ran on a proof-of-work system. Under this verification system, high-powered computers, known as “miners”, were required to run complex math problems to validate transactions. This process was highly inefficient and caused an exorbitant energy drain. For nearly two years, Ethereum has been running two blockchains in parallel, one using the old system of proof-of-work validation and the other using a form of validation known as proof-of-stake. The latter system relies on individuals and companies to replace miners and assume the role of validators. In proof-of-stake validation, individuals stake their own ETH and secure the blockchain by validating transactions themselves. In exchange, individuals stand to earn ETH incentives. Any malicious activity or failure to validate transactions/blocks assigned to you will result in a loss of your staked ETH.
“The merge” refers to the switch from Ethereum relying on these two parallel processes, to a blockchain solely reliant on proof-of-stake validation. The idea behind the merge is that the blockchain will reduce its energy costs by over 99%. This new transaction validation protocol will hopefully boost transaction speed and solve issues with scalability.
The new model for validation relies on principles we have learned in class. The only reason the new proof-of-stake model works is because of the anticipated payoffs which create a Nash Equilibrium that incentivizes “behaving” within the network and reduces the opportunity for malicious actors. Now the “dominant strategy” for participants favors participants themselves as well as the network, by keeping the entire system secure as well as generating profit for individuals.
Below is a very simplified example of a payoff matrix for participants’ behaviors in the new validation system for Ethereum:
Strategy A refers to a participant behaving “appropriately”, validating their assigned blocks, and acting in the best interest of securing the blockchain. Strategy M refers to a participant behaving “maliciously”, either by not validating their assigned blocks or engaging in some sort of malicious activity. The larger the number, the higher the potential payoff, because participants are monetarily incentivized to do good and keep the network secure. As you can see, the Nash equilibrium is (A, A) because behaving appropriately is a dominant strategy for both participants and the best response for anything the other participant might do. On a large scale, this same logic applies and keeps everyone in the network incentivized to not act maliciously. This system capitalizes on game theory to keep the network secure and reduce energy costs substantially, making Ethereum more environmentally sustainable, faster, more scalable, and ultimately more lucrative.
Sources:
Ashmore, Dan. “What Is Ethereum Staking? How Does It Work?” Forbes, Forbes Magazine, 12 Sept. 2022, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-ethereum-staking/.
Morrow, Allison. “What You Need to Know about the Ethereum ‘Merge’ | CNN Business.” CNN, Cable News Network, 16 Sept. 2022, https://www.cnn.com/2022/09/15/business/nightcap-ethereum-merge-crypto/index.html.
Sermeño, Rodrigo, and Ellen Kennedy. “What Ethereum’s ‘Merge’ Means for You, the Market, and the Climate.” Kiplinger, Kiplinger, 16 Sept. 2022, https://www.kiplinger.com/investing/cryptocurrency/605233/what-ethereums-merge-means-for-you-the-market-and-the-climate.