Blockchain developers aren’t the first humans to face identity verification problems. In the book of Exodus, Moses finds a peculiar bush that is on fire but not engulfed in flames. When it’s revealed that the burning bush is God delivering a message to his people, Moses asks quite reasonably: how will they know it’s really you who sent me, when I tell them? It turns out that not even God is above identity verification.
“Tell the people of Israel: I AM has sent me to you.” Exodus 3:14
When it comes to incentive programs, the problem is that there’s an inherent tradeoff between the virality of the program and its resistance to identity fraud. Anyone can create an algorithm that distributes a novel crypto-coin to every person in the world. Without any additional layers of security though, such network would easily fall prey to a Sybil attack. Put another way, fake identities would be created for the attacker to gain more rewards than they are fairly owed. Designing a system that is both viral and resistant to such attacks is a holy grail.
Do you remember the DARPA red balloon challenge? They sponsored a competition to find red balloons, and a team from MIT solved it in just a 8 hours using recursive incentives. Anyone who found a balloon for MIT would win $2000, and anyone who referred a balloon finder for MIT would win $1000. Even if you referred someone who referred someone who referred someone…you’d win some amount of money in return. The truth is that MIT was lucky that it solved the challenged in only a few hours, because Sybil attacks were most certainly on the way.
As Babioff, Zohar et al clearly pointed out, the system had the unintended consequence of incentivizing the creation of false identities to extract undue rewards. For example, if Alice knew where a red balloon was located, she could create two false identities, “Bob” and “Carol,” and claim to have been referred by them. She could add to her reward without doing any additional work.