Objective Functions
Making the Subjective, Objective
Paul Sztorc
truthcoin.info
Yale Econ Department
September 13th, 20151Agenda
1. Emergency discussion assistance (2 Slide)
2. Can we measure decentralization (with anumber)? (3 Slides)
3. P2P Governance / Measuring Bitcoin’s
Objective(s) (18 slides)

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Principles of Discourse• Without anagreed OF , allconversation ismeaningless.
• If reasoning istied to objective
principle,
conclusion will
always be true.

AS?

?

BWCX

DYEZ

Different
Objectives!

True
Statements
DifferentConclusions

3Flowchart
Has speaker stated what
they believe the blocksize
does for Bitcoin?

(Believe it or not)impossible to tell if
speaker’s reasoning iseven related to“Improving Bitcoin”.

NoYes
Has speaker statedconditions under whichblocksize should
decrease?

Yes

No(Believe it or not)speaker hasn’t
expressed a thought
related to increasing
blocksize, either.
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Measuring Decentralization (3 Slides)• “Not agreeing on
an objectivefunction”?
• Almost as bad:“not agreeing ona constraint”.
• “DecentralizedPayments”– What is“Payments”?
– What is“Decentralized”?
5Money• Abstraction of “favors”.
– “Know you’ve gotten ‘credit’for your favor”.
– “Convince trading-partner
they’ll get ‘credit’ for theirfavor.”– Those ^ ^ are actually mirrors(the same).

• We need the system toshow us “we’ve been paid”.
(“Paid” = finality).
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When is Money Decentralized?
Laws

Privacy constraint: tor bandwidth.
Who knows (“decides”) who’s been paid?
1 person ------------------------------------------- “Everyone”

Who can or can’t know?
(Who can afford to run a full node?)

Tor Metering with Bitcoin:
1. Be able to measure decent.
2. Vastly improve decent.
3. (Improve all upstream7bandwidth)A P2P System needs P2P Governance!
18 slides• Governance > Software– Can break software rules!
• Privacy?
• 21 million coin limit.

– Can allow Bitcoin to become
obsolete!
– Bitcoin’s weakest link (?)– LR Scaling? Likely only gov.

• But How to Govern?

UXSoftware/ Apps

ProtocolGovernance– Trade-offs: Censorship vs Spam, Coercion vs Sybil,
Groupthink vs Review-Cycle Burnout. (As hard as BTC ? )– “Experts?”, Who chose them? “Who watches thewatchers?” ( vs. Foolish non-experts ). Excluded people.

• No one has ever done this before.

8Markets: Proof of Expertise

Price System:Trades:
1. Knowledge and meta-knowledge (#1).
2. Constantly and unanimously acceptable.
3. Prices are common knowledge.

Succinct, easily-verifiable “expertise proof”.

9Event Derivatives(“Prediction Markets”)(Only) one ofthese pays $1

Splits a dollarand pays it
proportionally.
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Prediction Markets: The Costs
1. Oracle
1. …exactly once, we are going to need to have[easy-to-find] data be reported, honestly.
2. OF reported…after the fact. (Not during.)

2. Market Infrastructure
3. Traders
1. …to be interested enough.

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Worst News 1st: The Oracle• Truthcoin (experimental, requires pegged sidechains)• Federated Sidechain / Multisig Functionaries– People who own a lot of Bitcoin.
– Bitcoin co’s we plan to do business with.

• Trade-off: “Experts” (circular !) vs Representatives.
• Trade-off: Meta-Deception vs Deception.

122. Market InfrastructureMarket Scoring Rule

Traditional “Exchange”

MarketAZA

DBX

Z

ACX

YB
MarketCX
W

DIssuance?
Exchange?
Redemption?

YZ
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Decentralized Markets
In One Easy Formula
Arbitrary M.E. States (Max/Min, Yes/No)

Startup Capital (Tiny)

Price = Derivative14

Issuance, Buying,Selling, Redemption

Simplicity = Maximized15

3. Users
OF of 1 MB
Blocksize Bitcoin:
OF of 20 MB
Blocksize Bitcoin:
Compare16

Combinatorial Markets(Are Really Cool)
Exchange RateDecision Insurance(pays if a specified decision
is made, actuarially fair)

Blocksize > 1MB
1.
2.
3.

Why?

StableCoin / VolCoin Pair(“BitUSD”)(if OF = exchange rate)

SimplerMore liquidity / better marketing.
For each n dimensions (blue arrows),
we get (n-1) relationships.

17Win-Win Trading

1 – ( P3+P4 ) / P2

P3 * 1P4 * 1• Total cost must equal 1.
• Get 1 if “Yes”. ( Min/Max ignore-able )• Get r if “No”. r = Bitcoin return.

Buy a Bitcoin that you can return if Devs
make a decision User doesn’t like.

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Betting “in Fiat”

19Full Refund (“Time Travel”)• “Lock in” getting 100% of your FIAT money back (or more!).
• If ‘Good Decision’ then User gets this, co-varies with OF.
• (Completely incentive compatible).
• Charge fee and amp. liquidity (?)

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Costs Met
 Oracle – Slightly annoying.
 Market Infrastructure – MSRs
 Users – Fully Incentive-Compatible…what about benefits?
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OF = The Price

Bitcoin Market Price(Artist’s Representation)

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“P2P Governance”

Objective Function

Objective Function

Users either indifferent to the Dev-Decision, or they’re not.
If not indifferent, have an incentive to trade.

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Manipulation
1. Key: what gov. is least manipulate-able?
2. Don’t forget self-assessments.
1. Plutocracy (“rule of the rich”): 1 dollar, 1 vote.
2. Capitalism: 1 dollar risked, 1 vote.

3. Theoretical and empirical work.
1. “Where the rich fool manipulates, the poor expert
raises his head.”
2. Poker Sharks
3. Iterative Cartel Betrayal
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A Better Way (?)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1. Do research.
1. …
2. Trade on that info.
3. (Optional) Partner with a richperson.
4. You get rich, your message gets out.

…
Carefully publish/write-up research.
Defend research against skeptics (who misunderstand it).
Edit / rewrite research to make it more persuasive.
Attempt to communicate research to public.
Defend against mis-interpretations of your point of view.
Spend all day responding to emails, walking people through (in a few minutes) jargon /multiple inferential steps (that you yourself learned over 10+ years in the field).
12-year-olds on reddit call you names.
Spend all day responding to 12-year-olds. Meanwhile people accuse your work of being“too confusing” and go with politician/salesman type who is “more convincing”.
Message does not get out. ( No time to work on anything useful. )Where it takes 20+ years and 150+ IQ points to see the gap?

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Thanks!
And remember:
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