Digital asset management via distributed ledgers

Abstract

Distributed ledgers rose to prominence with the advent of Bitcoin, the first provably secure protocol to solve consensus in an open-participation setting. Following, active research and engineering efforts have proposed a multitude of applications and alternative designs, the most prominent being Proof-of-Stake (PoS). This thesis expands the scope of secure and efficient asset management over a distributed ledger around three axes: i) cryptography; ii) distributed systems; iii) game theory and economics. First, we analyze the security of various wallets. We start with a formal model of hardware wallets, followed by an analytical framework of PoS wallets, each outlining the unique properties of Proof-of-Work (PoW) and PoS respectively. The latter also provides a rigorous design to form collaborative participating entities, called stake pools. We then propose Conclave, a stake pool design which enables a group of parties to participate in a PoS system in a collaborative manner, without a central operator. Second, we focus on efficiency. Decentralized systems are aimed at thousands of users across the globe, so a rigorous design for minimizing memory and storage consumption is a prerequisite for scalability. To that end, we frame ledger maintenance as an optimization problem and design a multi-tier framework for designing wallets which ensure that updates increase the ledger’s global state only to a minimal extent, while preserving the security guarantees outlined in the security analysis. Third, we explore incentive-compatibility and analyze blockchain systems from a micro and a macroeconomic perspective. We enrich our cryptographic and systems' results by analyzing the incentives of collective pools and designing a state efficient Bitcoin fee function. We then analyze the Nash dynamics of distributed ledgers, introducing a formal model that evaluates whether rational, utility-maximizing participants are disincentivized from exhibiting undesirable infractions, and highlighting the differences between PoW and PoS-based ledgers, both in a standalone setting and under external parameters, like market price fluctuations. We conclude by introducing a macroeconomic principle, cryptocurrency egalitarianism, and then describing two mechanisms for enabling taxation in blockchain-based currency systems.