My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:
An open blockchain alone does not make good money. It is merely a method for all users to verify that transactions have not been altered afterwards, and no new money was illegitimately put into circulation. A mechanism is needed to ensure that the blockchain is protected from attacks and that the damage from a successful attack can be remedied.
Imagine a wealthy entity investing enough computing power to find a whole series of hashes that fit the target range using this to paralyze the blockchain or flood it with false transactions, or, worst of all, take control of the network.
The solution is as simple as it is ingenious, relying on two pillars. Firstly, the difficulty adjustment. Here, the target range is adjusted by an algorithm every 2016 blocks to maintain an average time of 10 minutes between blocks.
If an entity were to provide enormous computing power, the blockchain would still not grow infinitely fast.
Secondly, this breaking mechanism would give other network participants time to sort out false blocks and increase their computing power to find valid blocks again.
This is where the second pillar comes into play. In addition to validating blocks by each network participant, they must agree on the correct blockchain in case of ambiguity due to an attack or coincidence (two blocks are found simultaneously).
In case of doubt, the longer chain is always taken. Since each new block is cryptographically linked to the previous valid block, a valid chain will always be longer than an attacking chain, as long as 51% of the computers in the network are working on the honest chain.
This mechanism was described in 2008 by Satoshi Nakamoto and is therefore called the “Nakamoto Consensus.”
The unique feature of this consensus is that an attacker must not only achieve 51% of computing power once to attack the blockchain. They must maintain this superiority permanently; otherwise, honest participants could jointly build a new chain from a block before the attack, replacing the attacker’s false chain as the longer one.
In principle, this is a Mexican Standoff between all miners searching for valid hashes to continue the blockchain. If one misbehaves, all others will immediately attack them, and their computing power would be spent in vain.
Miners have the incentive to do this for three reasons:
- Block Subsidy
- Transaction Fee
- Nodes
The Block Subsidy is a fixed amount of new Bitcoin that each miner can pay themselves for finding a valid block. If someone attaches an invalid block, other miners can build a longer chain of valid blocks that exclude this block and thus receive the fee. Of course, it is much more likely that a valid block proposed by a miner to the network will be linked with other valid blocks and thus become the longest chain. To build on a false block, the majority of miners would have to conspire.
In addition, miners collect transaction fees for all transactions they include in their blocks. Miners who frequently produce invalid blocks would quickly receive no more transactions from network participants, as the risk of a chain rollback would be too great.
The last bastion is the nodes, which are all network participants who do not search for blocks themselves but validate them and store a copy of the entire blockchain. Bitcoin was designed, unlike other cryptocurrencies, to grow the blockchain slowly, allowing every Bitcoin user to check all Bitcoin transactions using affordable hardware (a full node can at the time of this writing be set up for under $200).
The nodes alone have real power over Bitcoin. A miner is just a service provider. If they build invalid blocks, nodes can refuse to accept them and freeze the blockchain until a new valid block is attached to the last valid block.
If someone wants to change the rules or the code in the Bitcoin network, they must convince a super-majority of nodes to accept the change.
In the so-called Block Size Wars, the power of nodes became apparent. Almost all major companies in the then young Bitcoin industry and most miners wanted more storage space in Bitcoin blocks to allow more transactions per second. However, a large part of the node operators did not want this, as it would have driven up the costs of operating nodes, possibly leading to centralization.
Such centralization would be a significant threat to Bitcoin. The self-interests of node operators ensure that the money supply can never grow beyond the almost 21 million BTC that Satoshi originally set in the code.
Each node operator can ensure with their node that only the rules and code they have installed are used in the network. If some participants use incompatible code, the network splits. The new network has the same transaction history as Bitcoin, but is no longer Bitcoin.
There have been several such hard forks, including during the Block Size Wars. However, since the majority of nodes stuck to the old code, the alternative Bitcoin copies quickly lost value and support. Miners could not cover their electricity costs and returned to mining valid Bitcoin blocks. One can thus say that the more individual node runners there are, the harder it is for a central entity to change or control Bitcoin.
Bitcoin’s innovation is not just a single line of code, but a combination of technology, network effects, and game theory. Every Bitcoin user can operate their full node, as long as they can afford the hardware and a few watts of power consumption, and by that, ensuring the Bitcoin network remains unmanipulated, and that no one can take away or inflate their Bitcoin.
Bitcoin uniquely links energy and money supply. No matter how much energy is used to mine Bitcoin, there will never be more than 21 million in circulation. More energy expenditure means the network becomes more secure, and each user has an incentive for the network to become even more secure over time.
The further Bitcoin’s adoption progresses, the more nodes and miners there are in the network, the more effort an attacker must put forth even to falsify a single block.
Today, an attack on Bitcoin is no longer possible by any single country. This is also the reason there can never be a second Bitcoin.
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