Contract-Theoretic Pricing for Security Deposits in Sharded Blockchain With Internet of Things (IoT)

Abstract

A sharded blockchain with the Proof-of-Stake (PoS) consensus protocol has advantages in increasing throughput and reducing energy consumption, enabling the resource-limited participants to manage transactions and in a decentralized way and obtain rewards at a lower cost, e.g., Internet-of-Things (IoT) users. However, the latest PoS (e.g., Casper) requires a steep security deposit, which is the key to provide more robust security guarantees than Proof of Work, but not practical for the owners of heterogeneous IoT devices. This article considers any individual and institute who owns the IoT devices as the potential participant and focuses on designing the proper security deposits in a practical scenario with hidden information and hidden action. To bridge blockchain and the IoT users, we study the problem of balancing the security incentive and the economic incentive under two cases: 1) stake oriented and 2) effort oriented. We propose two joint models under the contract theory framework to efficiently address the problems: 1) joint adverse selection and moral hazard and 2) joint adverse selection and tournament. Both optimal contracts can provide a maximized profit for blockchain. The optimal rewards and security deposits for different types of participants can be determined accordingly. Simulations indicate that the proposed models can overcome asymmetric information and offer feasible contracts. Moreover, it demonstrates that both joint models can provide an economic incentive for the participants without reducing security incentives for the sharded blockchain.