Bitcoin, like a well-run government, has checks and balances. These checks and balances encourage participants to act honestly.
Bitcoin’s checks and balances have kept the network running since January 3, 2009, processing a block of transactions every 10 minutes. Despite the lack of any centralized governing body, bitcoin’s hardcoded checks and balances have forced participants to act in the best interest of the network.
You may have heard that miners control the bitcoin network. That’s partially true. But they have serious checks and balances preventing them from completely controlling the network.
Akbar Thobhani over at Brave New Coin recently explored how checks and balances secure the bitcoin blockchain.
Today, we’re explaining how bitcoin’s checks and balances work, including how the checks and balances control miners, developers, and users.
Miners are the workers of the bitcoin network. They verify transactions, do work, then provide proof of that work to secure each block as its added to the bitcoin blockchain every 10 minutes. Miners receive block rewards and transaction fees in exchange for their work in securing the network.
When the bitcoin blockchain first launched, only a handful of enthusiasts were miners. Satoshi Nakamoto was one of the earliest miners, for example, and the bitcoin network difficulty was sufficiently low back then to allow mining on basic home computers.
Today, things have changed, and miners invest millions of dollars into elaborate server farms in far-flung parts of the world. Miners build entire facilities next to hydroelectric dams to ensure access to cheap electricity.
Despite the change in mining style, bitcoin’s network continues to have checks and balances in place to prevent miners from having unfair control over the network. Here are the checks and balances held by miners:
Miners’ Function: Creating And Securing The Bitcoin Blockchain
Mining the bitcoin blockchain is what makes it possible for the blockchain to be decentralized and secure. If someone wanted to hijack the network, they would need to have more processing power than the majority of miners on the bitcoin network. Miners also enforce the rules of the bitcoin network. They prevent a bitcoin from being spent more than once from the same wallet, for example, and enforce the pre-programmed rules of the network.
The Threat of Miners: Mining a Different Cryptocurrency
Miners have some sway over the bitcoin network. Miners are free to leave and mine a different cryptocurrency, for example. That’s the “threat” they hold over the bitcoin network. If a significant number of miners leave, then it leaves bitcoin less secure. If a rival blockchain-based cryptocurrency becomes more profitable to mine, then the miners will leave to mine that cryptocurrency. This could critically compromise bitcoin, leading to long transaction times and worse security.
How This Threat Is Mitigated
In practice, a number of checks and balances keep bitcoin miners behaving honestly and working in the best interests of the bitcoin network:
- In practice, the mining hardware you use to mine bitcoin may not be effective at mining other cryptocurrencies; a bitcoin miner, for example, wouldn’t make much money mining Ethereum and vice versa.
- If bitcoin miners leave the network seeking profit on other blockchain-based cryptocurrencies, then other miners will take their place on the bitcoin network seeking profit; if miners leave, then difficulty drops, which attracts miners to the network who would not have otherwise been able to profitably mine bitcoin.
- Mining profitability is linked directly to users, and mining profitability is linked to four specific things:
- The reward for mining a new block (12.5 BTC)
- The difficulty in earning the reward
- The cost of running a miner
- Transaction volume of the blockchain
- Bitcoin has a huge number of transactions at any given time, which means it’s one of the most profitable networks for miners to mine, assuming they have a high-powered bitcoin miner
- The high transaction volume keeps bitcoin miners from swapping to a similar network like Bitcoin Cash (BCH); the miners you use to mine BTC are equally as effective for mining BCH, but miners don’t switch to BCH because it has 10% to 20% of the transaction volume of BTC
Ultimately, bitcoin’s transaction volume and other factors keep the network secure and keep miners invested in securing the chain – it’s that simple.
Developers are the ones working behind the scenes. They modify bitcoin’s code. They submit changes to the bitcoin codebase. They’re the engineers, developers, and programmers constantly trying to improve bitcoin.
Naturally, you’d assume these people have enormous control over bitcoin. However, like miners, developers have checks and balances preventing them from attacking the network.
Developers’ Function: Improving Bitcoin
The goal of a developer is simple: to improve the bitcoin protocol. Developers work on different aspects of bitcoin’s protocol. Some focus on security, for example, while others focus on scalability. Some companies dedicate entire teams to improving the bitcoin blockchain.
Because bitcoin is open source, anyone can contribute to bitcoin’s development. You submit a proposal to the bitcoin GitHub repository, and that proposal is discussed in a democratic way.
The Threat Of Developers: Starting Off-Chain Projects
Developers have their own threat: they can start an off-chain project. Developers can create their own blockchain.
Obviously, that’s what has happened with every cryptocurrency launch to date. Litecoin, Dogecoin, Ethereum, and others all had teams of developers that could have built on the bitcoin blockchain – but decided it was more profitable to build their own blockchain and cryptocurrency.
When bitcoin launched, each bitcoin was priced at a few pennies. The same can be said for LTC, ETH, and XRP, among other projects. By launching your own blockchain as a developer, you can get people interested in watching your currency grow.
How this Threat is Mitigated: Mutually Assured Destruction
The only thing preventing a developer from creating a side-chain project is the threat of mutually assured destruction.
If the crypto space fragments too much, and we have too little development talent spread out over too many projects, then the entire crypto movement could be snuffed out.
The success of a blockchain project depends on a critical mass of users actually using the project. If developers continuously spawn new projects instead of fixing problems at original projects, it could lead to problems in the crypto industry.
Users are the third core group of participants in the ecosystem. Users are people who own bitcoin, store bitcoin, invest in bitcoin, or make transactions with bitcoin. Developers and miners are doing work for the sake of these end-users.
Users’ Function: Boosting The Value Of The Network
Users give value to the bitcoin network. Bitcoin is worth over $6,000 today because of the demand of users, and that demand is fueled by users who buy things with bitcoin, hold bitcoin as a store of value, or sell products and services for bitcoin.
If users didn’t do any of these things, then bitcoin would just be a neat tech tool.
As a growing number of users buy bitcoin and use bitcoin, the value of each bitcoin increases. You can use bitcoin at a growing number of stores worldwide. However, bitcoin still has a long ways to go before it’s a globally-recognized and accepted method of payment.
Threat Of Users: Abandoning The Network
Users have a check of their own against the bitcoin network: if users stop using bitcoin, then bitcoin will lose its value.
It’s possible that users could lose their faith that bitcoin is a secure store of value, for example. Or, a government might crack down on digital currencies like bitcoin. Other crypto projects could siphon users away from bitcoin with low fees and fast transfer times.
How the Threat is Mitigated: Clear Value Propositions
As Akbar Thobhani at Brave New Coin explains, the threat of users it mitigated by clear value propositions.
“There are two pillars within the community that work to mitigate this existential threat, and the developers and companies within the bitcoin space are responsible for upholding them: Education, Easy user experience”.
Bitcoin provides a clear value proposition to users with things like mobile wallets. Users don’t have to code their own software or create their own storage system for their private keys. They can download software that does the hard work for them, neatly packaged into an easy-to-use UI.
By offering clear value to users, users will continue flocking to bitcoin.
Checks And Balances Between Miners, Developers, And Users
Ultimately, here’s what this entire argument boils down to. According to Thobhani, these are the checks and balances that keep the bitcoin network secure and functional:
Miners keep the blockchain secure and growing so that developers have something to improve and so that users have something to use.
Developers improve the efficiency and user experience of the protocol so that it’s something users actually want to use.
Users spend and hold bitcoin as a means of value transfer and storage, making bitcoin sufficiently valuable that miners want to commit resources to mine it.
Thanks to these checks and balances, no single group has totalitarian authority over the others. These groups are all motivated to contribute to the bitcoin network in various ways.
Bitcoin’s checks and balances create a mutually-reinforcing relationship between participants on the network. Miners, developers, and users can all act in their own self-interest without compromising the network. They all play roles within the community, and because those roles are fulfilled, the bitcoin blockchain keeps operating – just as it’s done every 10 minutes since January 3, 2009.
You can read the full article from Akbar Thobhani at Brave New Coin. Thobani is a former software engineer from JPL/NASA who later worked as head of growth and business development at Airbnb before attaining his current position as CEO of SFOX, a broker-dealer for institutional cryptocurrency trading.