When bitcoin was created by Satoshi Nakamoto, he knew that there would be a need for transactions to be verified on the blockchain. As a result, he wrote consensus algorithms designed to help make this process self-reliant on the blockchain.
This consensus is known as Nakamoto Consensus, and is important in the verification of authenticated transactions on the bitcoin network.
The idea of this, in conjunction with his Proof of Work (PoW) consensus was designed to completely eliminate the need for trust, and allow the system handle the verification of transactions without the interference of anyone.
With this structure in place, bitcoin became the world’s pioneer Byzantine Fault Tolerant (BFT) open and distributed Peer to Peer (P2P) network. It does this through a globally distributed network of nodes that are unknown and can connect or disconnect from the network without it affecting the network’s performance.
To help you understand how this works, let’s explore all the elements of this consensus and how they contribute to the network.
What Is Byzantine Fault Tolerance (BFT)?
This is the capacity of a network to condone faulty conclusions, without it affecting the network as a whole. With this, instead of a perfect system where there’s a need for 100 percent approval of a transaction or leader, you only need the majority –often 60 percent- to ensure the transaction goes through.
So, it doesn’t matter if there are some rogue elements on the network, as long as the majority agree to a stated outcome –based on incentives- the outcome will stand. In the past, this could only work with close or semi-closed node networks.
But with the bitcoin network which is an open peer to peer network, this has proven wildly successful.
Of course, this only works because there are established rules based on certain precepts like game theory and cryptography, which help eliminate the need for a trust based system and allows the network run smoothly while remaining trustless.
Voting on the platform is kept honest by first preventing the control of the network by one group or a consortium, and second by ensuring that there’s a severe penalty for erring nodes duly influenced by incentives.
The bitcoin nipped this in the bud by introducing a second layer of security or verification, called the Proof of Work consensus. This allows the network remain as honest as possible, while verifying transactions in a trustless environment.
What Makes Nakamoto Consensus Successful?
As with all highly effective programs, Nakamoto Consensus runs successfully courtesy of the following elements:
- Proof of Work
- Block Selection
- Incentive Structure
Every one of these elements play a critical role in maintaining the integrity of the network and ensuring transactions go through smoothly. If one is missing, then you have a problem. All four need to be present to ensure their validity.
With these in play, as well as the inclusion of honest bitcoin miners being in the majority, the network will continue to be successful, secure and protected from the less than honest miners who would like to control the network.
Let’s examine of these critical components individually, shall we.
Proof Of Work Consensus
This is the backbone of the bitcoin network. The network essentially runs on this and is able to reward the miners by offering a specific amount of bitcoin for every new block mined.
These days, the reward is 12.5 BTC as against the pre-2016 era where it was anything from 25 BTC to as high as 100 BTC per block. Every part of the block that’s completed is usually preceded by problems that are solved –transactions really.
The key goal of PoW consensus is to ensure there’s no double spending –using the same money to buy multiple things at once. PoW helps make sure that your transactions go where they need to go, through a series of verification processes based on predetermined “rules”.
Every solved puzzle is added to the chain on the blockchain platform, with the longest chain considered the authentic one. Interestingly, the longest chain is also the one with the biggest concentration of power.
This is why it appears that mining pools solve more complex puzzles than regular mining units. Also, the combined computing power makes them incredibly advantaged in getting certain benefits that we’ll address in the next point.
The most important thing is PoW works super effectively when you have the larger majority of nodes run honestly. As long as the nodes are honest, you can rely on the transactional outcomes.
While this majority “votes” is great, it’s also the system’s undoing. This means that even if a transaction is wrong or illegal, all you need is 51 percent of all the votes to approve it. This is what is known as the 51 percent attack.
The good news is that owing to the cost implication of running miners, it is almost impossible for any one group or consortium to gain 51 percent of the votes.
That’s because it is an incredibly expensive venture, one that might potentially cost hundreds of millions of dollars. This prohibitive costs is probably why no one has tried to do so.
Block Selection And Winners
The second important element in Nakamoto’s consensus, this is one that differentiates it and gives it an edge over other types of consensus models. Random winners are chosen to get the block mining reward and become the block leader through a trustless, non-interfering process solely dictated by the algorithm.
This is why it’s often called a lottery as no one person is guaranteed to get the reward. The only thing that improves those odds is the computational power that’s put to use. Nodes with higher computing power typically solve more complex problems faster.
As a result, the algorithm is likely to choose that with the highest number of problems solved –although that isn’t guaranteed- as the odds are strongly in their favor. Whatever the case, block winners are picked on the basis of how fast they are with solving puzzles as well as how many they solve within a set timeframe.
This is why mining pools tend to make more money and are more profitable that solo mining as they utilize the combined power of all the mining units in their pool, thus becoming the recipient of the rewards.
Whatever the case, the block rewards don’t always go to the same person. If anything, the position isn’t guaranteed. Most of the time, a new block winner emerges in the next wound if they outperform others.
The process of doing this ensures that there’s no third party interference, as well as a predictable winner. This can only be determined by the algorithm based on the set rules. Ultimately, there are significant cost implications in mining. This will rise with the increased value of bitcoin.
In a manner similar to fiat currencies, Satoshi Nakamoto and his cohorts realized that for bitcoin to eventually become very valuable, there’s got to be the element of scarcity involved.
If there was an unlimited number of bitcoins in circulation, it would drastically reduce its odds of becoming valuable. But, because people place a lot of priority on scarcity, they appreciate scarce commodities.
Precious metals and minerals like palladium, platinum, gold, silver and diamond for instance, are so steeply priced and valued because they are very scarce and considered objects of value.
Satoshi and his cohorts had the hopes that bitcoin would eventually become an instrument of financial value, hence the limits placed on the quantity in circulation.
As of writing this article, the maximum number of bitcoins that will ever be in circulation is 21 million. Since the current reward for each block mined is 12.5 BTC and halved every 210,000 blocks, chances are by the time the whole 21 million bitcoins become available, the reward for mining would be too low to encourage participation.
Incentives For Miners And Nodes
Solving these increasingly more complex problems usually entails the consumption of electricity. The more complex the calculation, the more electricity needed. As a result, the network rewards nodes and miners for doing so, as well as keeping the network secure and validating transactions.
Mining a block of bitcoins currently yields 12.5 BTC. Of course this doesn’t go to one person/node. It is shared among the nodes that participated in mining that block as a way to keep them interested and running their nodes.
Nakamoto Consensus Conclusion
While this has been around for a while, the reality is that the consensus is time tested and proven. The elements are what makes it run so smoothly and effectively. If you have been wondering what the Nakamoto Consensus is, now you know enough to be informed.
While there have been efforts to improve on some of its components like the Proof of Work, none of the other consensus protocols have as much proven track record as Nakamoto’s components. Maybe they will in near future, but for now, thee Nakamoto Consensus still rules them all.