From Freedom to Tinker by Ed Felten:
Continuing our post series on ongoing research in computer security and privacy here at Princeton, today I’d like to survey some of our research on Bitcoin. Bitcoin is hot right now because of the recent run-up in its value. At the same time, Bitcoin is a fascinating example of how technology, economics, and social interactions fit together to create something of value.
Our Bitcoin work started with a paper by Josh Kroll, Ian Davey and me, about the dynamics and stability of the Bitcoin mining mechanism. There was a folk theorem that the Bitcoin system was stable, in the sense that if everyone acted according to their incentives, the inevitable result would be that everyone followed the rules of Bitcoin as written. We showed that this is not the case, that there are infinitely many outcomes that are stable yet differ from the written rules of Bitcoin. So the rule-following behavior that we currently see is at best stable in the weaker sense that if everyone else is following the rules (and no one mining entity has too much power) then deviating from the rules will cost you money.
Beyond this, we have built a better understanding of the “political economy” of Bitcoin—how the Bitcoin community governs itself to keep the system operating well, despite the lack of a central authority and despite the complicated issues around the theoretical stability of the protocol. The ultimate goal of this line of work is to understand how Bitcoin is likely to deal with challenges in the future, and whether there are feasible changes that could improve the governance of Bitcoin.
Since then, we have started several more Bitcoin-related projects. My faculty colleague Arvind Narayanan (who joined us last year) as well as several more students are working on Bitcoin, and the pace has accelerated. We’re building tools to track and diagnose the behavior of the peer-to-peer network that Bitcoin participants use to spread information about what is happening. We’re looking at the dynamics of mining pools, in which a group of miners cooperate to spread the risk inherent in the mining process. We’re considering new types of double-spending attacks and how participants can defend against them.