In Algorand, participants selectively run a verifiable random function (VRF) every round to determine if they are a member of a “committee” comprised of validators and proposers. This cryptographic technique creates a rotating validator set, allowing individuals to know (and prove) that they are a validator in a round without releasing that knowledge to the rest of the network a priori. In a round, proposers (of which there might be multiple) propose blocks and the validators vote on the inclusion of these blocks, with voting power in proportion to the funds they have in the network. Consensus is achieved when the a prespecified threshold of validators agree on accepting the new block.
Alexis Gauba and Zubin Koticha are working on Cryptoeconomics Research at Blockchain at Berkeley. The team has written a working paper on 33% Attack Vectors in Proof of Stake and is actively working on many open problems in this space.
Micali states that, compared to Bitcoin, the Algorand protocol requires trivial computation, so “you don’t need incentives.” He also states that “We must use incentives as a last resort. I believe I can [make Algorand work without incentives], but I have no formal proof that I can, because these formal proofs are much harder than the proofs of [correctness in] Algorand.” However, Micali also admits that one might be able to devise “secure incentives” to create a more robust protocol and in the study of game theory and microeconomics, there is evidence that a cryptoeconomic proof of an incentive scheme’s optimality is feasible. We agree with his view that secure incentives could be created, and so in this post we provide key reasons as to why incentives (both positive and negative) are a necessity in Algorand. Many of the arguments we outline below can be applied to other non-PoW protocols.
Next, in any monetary system with financial assets and/or interest rates and inflation there is an opportunity cost to holding cash. In incentive-free Algorand, if there is no way for an honest validator to make a profit through maintaining the network (i.e. if there is no incentive scheme), then this individual’s money isn’t growing. That is, an individual with 1,000 Algorand-coins will continue to have only 1,000 coins regardless of how much good work they do. During that time, they could have bought assets, mining equipment, or government bonds etc. and increased the value of their holdings to more than 1000 Algorand-coins. For these honest validators, their protocol-following work is costing them the financial freedom to invest and earn interest.
The last strong conviction in favor of an incentive scheme goes into the question of Darwinistic principles that affect blockchain systems. Successful blockchains, like all other systems, are influenced by several different selective pressures that determine their ability to succeed and adapt. The honest validator above who has her money in an Algorand implementation without a reward-scheme is sacrificing monetary gain by bearing the opportunity cost of holding those Algorand-coins. All else being equal, if all honest validators were to see a fork of Algorand’s code which pays validators (even modestly), then at least some would leave the original fork to participate in validation on the new fork. This drain of honest validators would be extremely harmful to the network. Losing those who honestly maintain the network would lower the difficulty for an adversary to reach the Byzantine threshold of 33% command of the network. With fewer proposers, the likelihood of always having a live proposer decreases, leading to potential network slowdowns.