Navin Kabra on Game Theory and Blockchain: Notes

Navin Kabra was on campus yesterday, to talk about blockchain. More specifically, game theoretic aspects of blockchain. The talk was excellent throughout, and lasted well beyond the scheduled 90 minutes (and I mean that as a compliment!)

What follows are my key takeaways of the talk (although I have cheated just a little bit):

Introduction

  • Navin began the talk with a brief summary of the prisoner’s dilemma, the Nash equilibrium, repeated games and iterative games
  • He briefly touched upon the surprising success of the tit-for-tat algorithm
  • He mentioned the Schelling point

The Use Case

  • He then got into the need for a technology such as blockchain. He used land records and trust issues from this area as a use case.
  • When I buy land, or an apartment, from somebody, the following issues emerge:
    • How do I know that the land is yours to sell?
    • How do I know that you are you?
  • Of these, we focused more on the first one: how do I know that the land is yours to sell?
  • Without blockchain, the idea is to go to a centralized repository, and check who owns the land. If it is indeed the person who wants to sell you the land, great. If not, ask the prospective seller to buzz off.
  • But how do I make sure that the prospective seller is who she says she is?
  • One way to prevent this from happening is by using modern cryptography to digitally sign these land records. Navin didn’t mention this in his talk yesterday, but here’s one recommendation to learn more about this topic: The Code Book.
  • But what if the prospective seller has sold the land to somebody else, and gotten that transaction struck off the official record?
  • Enter blockchain

The Basic Idea

  • Take a block of transactions, and apply a seal to them. A digital seal, although the idea is the same as a mohar.
  • But that’s not enough: what we then do is also use an identifier for this block of transactions, that is generated in a unique, but random way, from the previous block of transactions (this is called a hash).
  • If somebody were to hack into this block of transactions and change something, it would therefore change the hash for the next block, rendering the next block untrustworthy.
  • This dependency works across the entire chain of blocks, hence “blockchain”.
  • Better still, this entire chain of blocks is not stored on one central server, but across many different servers – this is the distributed ledger concept.

The Distributed Ledger

  • So why would these different servers (or rather, their owners) want to be a part of this?
  • So here’s the incentive mechanism: servers solve an algorithm that isn’t difficult, but is time consuming. Whoever solves the next chunk of this algorithm gets to seal the next block, and alerts all other servers about having done so.
  • Once all servers get this alert, they all update the chain of blocks so that everybody has the same version of events. This, of course, happens automatically.
  • The server that sealed the latest block gets as reward: bitcoins.

Bitcoins

  • These bitcoins are, in essence, a reward mechanism for making blockchain work.
  • Once folks start trading these bitcoins, especially in exchange for stuff from the real world, the value of bitcoins goes up.
  • We didn’t explicitly speak about this yesterday, but here’s my understanding: It becomes, as with any other currency, a medium of exchange, and also a store of value. (The unit of account bit is more troublesome, and I won’t get into it right now)
  • That reward mechanism is randomized, in the sense that any computer/server is equally likely to crack the next chunk of the algorithm. The more computing power you have, over timethe more you will get a higher share of bitcoins.
  • The number of bitcoins that can be mined is limited, and the number that is released per chunk of algorithm solved may change as a function of the number of computers trying to compete. In other words, the incentive mechanism is built in (I was rather impressed with this)
  • There are ridiculously large buildings in China stocked to the roof with servers whose sole objective is to mine bitcoins.

Game Theoretic Aspects of Blockchain

  • This is as pure an experiment in game theory as one could hope for.
  • You have people, necessarily anonymized, who can’t communicate with each other, who are trying to mine bitcoins
  • Also, you have folks who are, again necessarily anonymized, trying to transact using bitcoins.
  • Should they cooperate with each other or not? What are the implications? Since I’m already at around 750 words right now, I’ll outsource this part. Do read it, it is a very good summary of both game theory as well as its application to blockchain.

Also…

  • I enjoyed the fact that the numbers 42 (check the last bullet point, especially. But also, see this), 1729 were used in the presentation. This had nothing to do with anything, but Easter Eggs are always fun.
  • Also, yesterday I learnt (is YIL a thing? It should be)
  • I (and I think I speak for all the students who were present yesterday) would love to learn more about applications of Bitcoin. If there are folks in Pune who would like to come talk about this at Gokhale Institute, please get in touch! ashish at econforeverybody dot com

 

Finally, a huge thank you to Navin! The talk was hugely informative, thought provoking and easy to understand – and that’s a very rare combination indeed.

Launching the One Book a Month Club @GIPE

Calling it a club is a bit of a misnomer, since it’s mandatory for the undergrad students at the Gokhale Institute, but it just sounds cooler.

One thing that we wanted to fit in (but couldn’t) for the undergraduate degree at Gokhale Institute was a Great Books program. In retrospect, that was a blessing in disguise, because it has given me the chance to launch this instead.

The One Book a Month program involves inviting one person a month to nominate a book that they think young folks absolutely must read. Said young folks read the book,  and write a five hundred word report on the book. At the end of the month, all of us – person, young folks and I – sit down and talk about the book. Rinse and repeat. There’s a competition, with rules, carrots and sticks – more details here.

But stripped of all the razzmatazz, it really is just an effort to get people to read more – which is kind of the whole point, no?

Amit Paranjape has very kindly agreed to kickstart proceedings, and his book of choice for this month is Sapiens, by Yuval Noah Harari. I’ll share the date on which we’ll have the talk with Amit – if you happen to be in town, and are interested in attending the talk, you’re most welcome! We’ll also be putting up the discussion itself on YouTube and on a podcast based on this series – links to those will also be made available.

If you have book suggestions, guest suggestions, or other suggestions about how this series could be made better, I’m all ears! Drop me a mail at ashish at the rate econforeverybody dot com.

Lunch With FT: Richard Thaler

“One thing for sure is Remain is a horrible name. It’s weak. Whereas Leave is strong.”

Richard Thaler is by now a household name – well, I think so at any rate, and this interview that he gave to Tim Harford (who should be a household name!) is worth reading in its entirety. You’ll need to sign in/register, I think – sorry about that.

Quick update: we’re conducting a workshop on behavioral economics for undergrad students at GIPE this week, and I’ll post nuggets such as these along the way.

A five part series on behavioral economics

This week’s posts were going to be about podcasts that I listen to, but I’ll push that out to next week.

I and a colleague of mine at the Gokhale Institute (which is where I work) are running a five day seminar at the Institute on behavioral economics. This one is for undergraduate students only, but based on how this one turns out, we might do a couple more through the year. But for that reason, I figured we might take a look at behavioral economics is, and explore work being done in this area, and why it matters.

In this post, I’ll give you an overview of behavioral economics, and in the five subsequent posts that follow, I’ll detail what we spoke about in each session.

First things first: behavioral economics really is a tautology, because economics is the study of choice, and we make our choices given what we know and given what we feel.

The trouble is, modern economic theory (most, but not all of it) would tend to say that what we feel ought not to matter, and in fact doesn’t actually matter in the real world. Except we’ve all demolished a big fat bowl of ice-cream because we’re feeling blue, the diet be damned. We’ve all bought items on sale on Amazon, when we clearly had no need for them. And we’ve all chosen to play a game on the phone over completing a task at hand, and hang the consequences. I could go on (and not just where individuals are concerned, but firms and governments too!), but you get the picture.

We’re all predictably irrational.

In a sense, behavioral economics is about the first word in that link. As a social scientist, it’s not much use to say that we’re irrational. That’s akin to saying that there’s nothing that we can say, do or predict about the choices that all of us make.

But predictably  irrational? Ah, how exactly? If our irrationality can actually be modeled, then perhaps we could understand how and why we make the choices we do. Even better, maybe we could push people towards eating more salads and less ice-cream. Although you should note that there are some people in my tribe who don’t necessarily think this to be a good idea.

Still, the study of

a) whether we think “rationally” or not, and…

b) if not, then can we think systematically about how we are “irrational” and why…

c) and can we use our findings from this exercise to make people, institutions and therefore societies behave differently (and hopefully better)…

…is the study of behavioral economics.

And the five day version (duly expanded) of this is what Savita Kulkarni and I will be talking about at Gokhale Institute over the course of the next five days. And I’ll keep you guys updated as we go along.