Jan 4 • 5M

Letter #74: Miners vs. Nodes - Checks and Balances on the Bitcoin Blockchain

Read now to learn why miners and nodes go hand in hand when it comes to securing the Bitcoin blockchain.

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Dear Readers,

Whether or not you believe it, our world revolves around money. Money is one of the most important inventions in human history and the quintessential example of money accomplishes, at a minimum, the following:

  1. Allows us to transact with anyone in the world at any time for any good or service.

  2. Allows markets to assign capital goods (i.e., resources) to the person or business that would most efficiently employ it for productive purposes.

  3. Allows value (i.e., savings) to be transmitted across time without suffering any loss.

All money operates on top of networks. In ancient times, monetary networks were entirely composed of peer-to-peer transactions that used physical mediums like gold and silver. Networks like that persisted for thousands of years and are still part of today’s world to a small degree. However, as our world has digitized over the past several decades, the majority of money in existence has also gone digital. For example, many of you likely have a lot more money sitting in bank accounts and retirement accounts than you have in the wallet in your pocket or stuffed under the proverbial mattress. While certainly not superior in every way, digital monetary networks are by and large easier to use than their predecessors.

From an operational standpoint, tangible networks require very little trust compared to the digital networks of the past several decades (i.e., settlement networks from central banks and payment processors). The former required only that a payor trust the counterparty and for only as long as it took to hand over one’s money in exchange for a desired good or service. The latter on the other hand required the same trust just mentioned, but layered on top of it trust in every middleman involved in facilitating the transaction. Humans are fallible by nature, so it goes without saying that the fewer trusted parties involved in a transaction, the better. In fact, it’s for that very reason that the Bitcoin blockchain, a truly decentralized global settlement network, is gaining such prominence in today’s world.

Decentralization Is More Than Just Location And Ownership Of Mining Machines

When it comes to proof-of-work blockchains like Bitcoin, it’s common to hear people talk about decentralization in the following terms:

  1. How spread out geographically miners on the network are in relation to one another. 

  2. How concentrated ownership of miners in terms of hash rate is from entity to entity.

Both metrics certainly are important in the context of preventing single points of failure caused by natural disasters or external attacks by governments, for example. Regardless, looking at miners, and nothing else, leaves out an important participant in the operation and decentralization of the blockchain: nodes. While nodes and miners have the same goal (i.e., maintaining the blockchain), they have different roles and both are required to ensure a fully-functional network:

Miners

As we know from a prior discussion, Bitcoin miners are powerful computers on the network that help secure it by batching transactions together and then submitting them for everyone else to check. People often think that miners validate transactions, but that is not entirely correct. After all, miners can submit false transactions to the rest of the network, and indeed such behavior is the basis for attacks on the blockchain like a double spend. As a result, it’s probably more appropriate to say that miners confirm transactions and then send the completed block onward for actual validation.

Nodes

The phrase “validating transactions” likely applies to nodes on the blockchain much more than it applies to miners. After transactions are broadcasted to the network and confirmed by the miners, nodes validate that all transactions in a proposed block conform to the rules of the blockchain, the most important of which is ensuring that the entity originating the transaction actually has sufficient Bitcoin to send.

It’s sometimes said that nodes are the most powerful participants on the Bitcoin blockchain and that’s likely because nodes have different incentives than miners. The only reward a node receives for its work is that the blockchain keeps moving forward according to plan. A node’s work is both altruistic, in that it benefits all participants by supporting the network, and self-serving, in that it protects the node operators’ own wealth stored on the network. Miners on the other hand receive block subsidies and transaction fees as supplementary rewards and are in direct competition with one another to earn them. As a result, miners might be incentivized to accept fake transactions that include high transaction fees or to sacrifice transaction accuracy for speed in creating a block.

In a nutshell, the security and functionality of the blockchain is dependent on miners defending the network and confirming transactions through the expenditure of their computing resources and on nodes validating that all transactions follow the rules established by the blockchain’s code. While both groups of participants usually have similar goals, separating their responsibilities and providing each group with different incentives helps to ensure that self-interested users are less able to take advantage of the network at the expense of everyone else.


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Into the Twitterverse 🐥

The fiat system takes from the poor to give to the rich and powerful. Let’s relegate to the past and move to a Bitcoin system:

No one who has ever successfully held Bitcoin for more than three years has ever lost money, even in fiat terms:


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