On Eve, Plex, ISK and Bitcoin

While browsing around the Internet today I came across an article on Dr. Eyjolfur Gudmundsson's view on Bitcoin in comparison to ISK and Plex, the main currencies of the Eve Online game. Reading into the points mentioned a bit further one comes across similar points that have been raised against Bitcoin many times. However, the comparison between Bitcoin and Plex is interesting enough that it can make for a good discussion.

Eve Online in brief

Just to make sure we're all on the same page here, let me quickly bring everyone up to speed on Eve Online and things surrounding it.

Eve Online is a space MMO game that is heavily focused on open-ended gameplay. Unlike most MMOs, where grinding for levels, loot and quests is the main focus of the game, Eve is a lot more focused on economics and large player corporation versus player corporation warfare. Most items in Eve are crafted by the players from simpler objects. For example, ores are refined into metals, which are built into modules, which build space ships the players use. Eve's economy is based on players performing each of those steps - players dig the ore, refine it and so forth, not the NPCs. Because of this, Eve's economy is closer to reality, with large supply chains, supply and demand, than say, World of Warcraft.

Eve's economy is running on ISK - The Interstellar Kredit. They are the base currency everyone is using in the game to buy and sell their wares. Eve is a subsciption-based MMO, meaning that each player has to pay each month in order to play the game. They can do it for real-world money, or they can buy an in-game item called PLEX - Pilot License Extension. Plex is bought and sold for ISK just like any other item in the game. The players can also buy Plex for real world money and put it in the game to sell for ISK if they want to get some in-game currency without having to grind for it. However, players can't sell Plex for real money, because that's violating the terms of services of the game.

So the exchange chain looks like this: fiat->Plex<->ISK<->Everything else in the game.

Arguments against Bitcoin

Dr. Gudmundsson raised a few points against Bitcoin in comparison to Plex:

1. Bitcoin is volatile
2. Nobody knows who is behind Bitcoin
3. Bitcoin relies on trust
4. Makers can cash out and crash the market
5. Asks to prove that Bitcoin is not a scam

I do agree that the price of Bitcoin is volatile, but it's driven by an open market. Anyone can buy and sell it freely, so the price can be gamed by anyone with enough money and determination. Price of Plex in fiat is stable, because the market is a monopoly owned by CCP and people they license it to. You don't have a free market for Plex, since anyone that tries to sell the Plex they own gets their account shut down by CCP. Moreover, the Bitcoin market will never be flooded with excessive Bitcoins, sicne you can't make them out of thin air, unlike Plex which can be created at a whim. Heck, if someone makes a mistake selling Plex, like Amazon did (selling it at 90% discount), the commodity suddenly can lose a lot of value. All in all, Bitcoin's price is determined by free market, Plex's is determined by its monopolistic producer. Both of the approaches work because they both fulfil a different role.

Points 2-5 have been done to death and aren't that interesting in comparison, so I'll skip them. Instead, I will make some more general comparison between Bitcoin and Plex.

Bitcoin vs Plex

The main points Dr. Gudmundsson is making, is that a currency needs a government or an entity to back it - to assure it's value, price stability and so forth. In case of Plex - it is redeemable for game time and for ISK, therefore it's valuable. However, it looks like the big point about Bitcoin that Dr. Gudmundsson is missing, is that it is valuable because it's not controlled by anyone. If anyone backs a currency, that currency will only be worth something as long as they are around. Take E-gold for example - it was a centralized company backing its own currency. Because they had a real-world presence, they were shut down. CCP can be shut down and Plex will be worthless then. Bitcoin, just like gold cannot be shut down, since there is no central point of failure. Anyone can transact in Bitcoin as they do in gold if they have it - they don't need a third party to let them do so. Because Bitcoin enables anyone to transact with anyone around the globe instantly, it's valuable to the people that need it and that's one of the ways it derives its value.

Now lets say I wanted to use Plex like I would Bitcoin. I pay my friend a Plex for a drink, I start transacting with a few other people, and soon enough my Eve Online account is shut down since I just breached the terms of service... Well, so much for that... But lets say CCP relaxed their stance and let you trade Plex for anything. By necessity, it would be trade-able for USD (either it's trade-able for everything or nothing). Someone starts buying some illicit things with it and CCP suddenly finds itself needing a FinCEN Money Services Business license (Plex would be categorized as a centralized virtual currency). It's workable - now to buy some Plex you just need 2 photo IDs, a utility bill and you're all set (unless your account gets flagged for suspicious activity).

However, if all of this was tackled correctly, we could see a few interesting things come out of it. First of all, there would be little to no discounts on Plex - it would need to be sold at the market value, or else you would be just giving people money. On the flip side, people could start making a real income for playing Eve. You could have full-time professional players making a living wage. This could be huge! Thirdly, you would see people starting to use Plex to pay for real-world goods and services. With certain setups it would be damned easy, but that's a topic for another day.

Conclusions

At the moment, Plex is not a good currency outside of Eve Online as its use is heavily restricted by CCP and the terms of services. Given free reign, it would be a very interesting commodity-backed currency. Dr. Gudmundsson's arguments against Bitcoin are mainly misplaced and are similar to many concerns raised over the years.

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I personally would love to see Plex explored as a free currency outside of Eve Online. If anyone from CCP would be interested, I could give you a personal overview of how it could be easily done and even show you a live demo of the implementation on live, existing technologies without any special code created by me.

Likewise, if Dr. Gudmundsson would be interested in having his concerns about Bitcoin addressed, I can personally explain every concept to him.

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Interesting topic that didn't make it to this post but I would probably want to explore in the future - ISK as a currency with inevitable inflation...

Thoughts on Delegated Proof of Stake and Bitshares

Today at Decentral.Bangtown meetup we had Max Wright and Dan Larimar introduce us to the concept of the Delegated Proof of Stake (DPOS), how it compares to Bitcoin's Proof of Work, and DPOS' first implementation as a part of the BitShares platform. We were encouraged to try finding problems with the protocol, but due to time constraints we weren't able to address all of the issues. So I figured - why not write my thoughts down and let everyone discuss whether they are valid concerns or not.

Coin distribution

During the presentation, we discussed how proof of stake and proof of work secure the network from 51% attacks through different means. I wanted to point out however, that proof of work has another very important function that proof of stake can't fulfil as well - initial coin distribution.

Say Bitcoin started initially with only PoS. Satoshi got the first 50BTC. After that, he owned 100% of the network. He would get the next block, and the next block, and the next block, since at all times he would own 100% of the coins. But even saying that he was generous and gave away all of his coins to a number of people, those people would own the entire network. The rich would get richer, and the poor would get poorer.

There are ways around this problem. Some coins use a hybrid PoS/PoW model, some switch from PoW to PoS after some time, etc. BitShares distributed their initial coins by selling them at a regular interval, Counterparty used Proof of Burn for issuing currency. That's all well and good, but neither BitShares nor Counterparty would've been able to accomplish their model effectively if they were not building atop of what Bitcoin and previous network have done. Satoshi couldn't have sold his initial coins for money without sacrificing his anonymity in a pre-Bitcoin world.

As long as the initial PoS currency distribution is fair (however fair would be defined), there isn't an issue. However, a lot of people can disagree what a fair distribution is and whether the initial distribution was in fact fair...

Paying for mining

Another issue raised was that mining creates a lot of cost for the Bitcoin network. Since miners earn 25BTC every 10 minutes, in order to cover their costs they will most likely need to sell those 25BTC at an exchange to get fiat to pay their bills. This means that unless there is a new buy order for 25BTC every 10 minutes, the price of bitcoins will be going down due to that constant pressure.

In my opinion we should also consider the flip side of this issue - the labour theory of value (the value of a good is determined by how expensive it is to produce it). In other words, since it costs miners X to mine 1BTC, they will not sell their bitcoins for less than X/BTC. Provided the miners have enough patience to wait for their bitcoins to be sold at that price, the cheaper coins will be bought up until there are none below the miners' price, therefore the market would have to eventually increase the price.

DDOS on delegates

As it was explained during the presentation, DPOS operates by the network electing a pool of delegates to secure the network. For BitShares, that pool is 101 delegates. If a delegate does not perform their duties (mining blocks when it's their turn), they are kicked out of the pool of delegates and a new delegate is chosen to replace them.

This leaves a lot of room for attack on a small number of nodes. Since most delegates probably won't have a state of the art computing centre to protect themselves, they will be vulnerable to DDOS attacks, among other things. If someone was determined to disrupt the confidence in the network, they would only need to go after the delegates once by one and take their machines out of the network. Of course the delegate pool would reshuffle each time with new delegates, but if good agents are taken out on a regular basis and bad agents have a chance to replace them, it would be possible to have a disproportionate amount of bad agents disrupting the network.

Since the delegates are also supposed to be transparent public figures in the space, they would be vulnerable to a lot more attacks like the rubber-hose cryptoanalysis.

Margin delegate coercion

BitShares has a pool of 101 delegates. Delegate number 101 earns 1/101 of all fees from the network. Delegate number 102 earns nothing. Such steep drop off  can be a dangerous thing.

The situation is similar to the problem of match fixing in professional sumo, as described by Steven Levitt in Freakonomics.

Essentially, the issue boils down to this - if you are at a borderline between winning and getting everything, or losing and getting nothing, you are more likely to cut a deal with someone and secure your winnings through generally frowned upon measures, such as match fixing.

Now lets say I owned a few percent of BitShares, say, 5%, and the delegate 101 has 80% approval. I can approach anyone with 75% approval, or in some cases even 70%, and cut them a deal - you pay me 50% of your earnings, and I will give you that mining spot. I remove the votes from delegate 101 and lower, add my votes to my chosen delegates 102 and up, and I control them, at least as much as they are willing to give up for the slice of the mining pie.

I don't even need votes to bring some people down. Spreading rumours is easy on the Internet, and since most people don't fact check and act impulsively, it wouldn't be too hard to remove some marginal delegates from their ranks.

Some people just want to watch the fees burn

With proof of work, the incentive for a miner is simple - they want to have as much computing power to earn as much fees and block rewards as possible. If you want more computing power - you need to spend more money, simple enough. With DPOS, each miner wants to win as many votes as are needed so they would stay in the pool of 101 delegates so they can earn as much fees and block rewards as possible. To do that, they need to be appealing to people with a lot of votes - not the average system users, but the big hoarders with big pockets.

Asides cutting some direct deals with the hoarders, the delegates can also change the transaction fees. From what I understand, each delegate can set how high the transaction fees are, and how much of those fees is burned. By lowering the fees, you appeal to the users that transact more, making it cheaper for them to operate. If you increase the amount of fees burned, you essentially give everyone holding the remaining shares the fee in proportion of how much shares they own by decreasing the money supply.

If delegates would be incentivised to appeal to the users of the system, they would keep the fees low and the burn rates high. However, since they are appealing to the hoarders, they would want to keep the fees high while keeping the burn rates high as well. Unless the system users own the majority of the shares, they will likely be paying more and the money will end up mainly in the pockets of the wealthy minority.

Malicious wallets and services

At the moment there is only one wallet for Bitshares to the best of my knowledge. If the system catches on, we can expect a lot of alternative implementations. We'll see our Blockchains, Hives, Pheevas, or even a fair share of shared ewallets.

Now, since each share in the system is a vote, whoever has access to those shares controls the network. If someone created a malicious wallet that could be used in manipulating who is the delegate, they could have a lot of leverage in the system.

Similarly, big services with big wallets, like say, exchanges and JustDice-like gambling sites would have a large sway over the network. It might be all good if we're dealing with Bitstamps, but what if we're dealing with the MtGoxes of the world?

BitShares and lack of Gateway incentives

I recently started comparing a lot of Crypto 2.0 platforms against one another, only to find that few of them have built-in incentive for Gateways. In my opinion, having such things in the system is essential. From what I understand, instead of allowing you to create any asset on the system, BitShares allows you to lock in your price with futures contracts. This is all well and good if you want to keep the value, but don't really want the underlying asset, which is good for price speculation, but not actual use. This reminds me a lot of what Locks did - "locking" your bitcoin value to a specific asset only so you can later redeem it as bitcoins in the amount proportional to the exchange rate in the future. So if I want 1 gram of gold worth of bitcoins a year from now, I pay 1 gram of gold worth of bitcoins right now and later get the appropriate amount of bitcoins. But, what if I want to get gold instead? Well, I'm out of luck. More on that discussion here.

Conclusions

So in conclusion - DPOS is an interesting idea and it's definitely an improvement on POS, but it's by no means perfect. The pool of delegates appears to be the most vulnerable area of manipulation or attack. Too much power over the delegates lies in the hands of the richer part of the network, and their incentives don't necessarily align with the most active users of the network.