The BSV Academy’s free Introduction to Bitcoin Infrastructure provides an in-depth look at the role of nodes and node operators in building the Bitcoin network. It covers the incentives that drive enterprise operators to invest in this infrastructure. The course is based on the Bitcoin white paper and students are encouraged to read it for a deeper understanding.
Upon completion of the course, students will receive a certificate of completion. The course includes a Discord channel for support and a contact form for feedback. The objective of the course is to enhance understanding of the network and its economics, to ensure that new services are built effectively, and to maintain the network's performance through continuous improvement of client software and services.
To make it as effortless as possible for you to have access to this educational material, we are publishing the entire course here on our blog. Stay tuned for a section-by-section release, and remember that you are still welcome to enrol in the BSV Academy to gain a certificate of completion to add to your resume.
Introduction to Bitcoin’s small world network
As we have seen, nodes participate in the process of collecting and time-stamping transactions. They maintain the network by following some very clear instructions from Section 5 of the Bitcoin whitepaper, and by managing those directives under a set of rules which are collectively enforced by nodes using the Nakamoto Consensus.
This is reiterated in the Bitcoin whitepaper several times, including the final sentence which reads “Any needed rules and incentives can be enforced with this consensus mechanism”.
In this next section, we will explore how these directives not only make sense from an operational perspective but through that perspective create an incentive-driven interconnected behaviour which leads to the nodes spontaneously forming a ‘Small World Network’, which trends towards a Nearly Complete Graph.
The word ‘spontaneously’ is used to reflect the fact that there is no centralised leadership driving this behaviour, and that the system remains robust even when well-connected nodes leave, are disconnected, or the network is otherwise disrupted.
Due to the compensation mechanism, there is a very strong incentive for nodes to ensure that new transactions and valid block hashes reach other effective network nodes as quickly as possible.
In this section, we will look at some of the key incentives that are driven by the proof-of-work process, including the hyperconnection at the densest layers of Bitcoin’s core network.
The decentralisation of power in Bitcoin
One of the words used most commonly when talking about Bitcoin is ‘decentralisation’. Unfortunately, there have been times when this has been misunderstood to the point that it has become a destructive impediment to the network’s need to scale. It is important to distinguish between decentralisation of consensus; such that anyone who holds a copy of the ledger, versus decentralisation of decision-making power and infrastructure.
Nodes are controlled by enterprise entities which have corporate structures and operate within highly regulated environments. The intense hardware development and difficulty involved in participating in the mining process limits participation, however, no one party within the global group has leadership or power over the whole network.
While the network has no ‘centralised’ leadership, the system is still coordinated and operates in a manner much more akin to a distributed system. The requirement to show proof-of-work to submit a block limits the ability of any party to participate in the consensus process. Valid blocks are the only type of message that can impact the network rules, and they cost money to create which creates an environment where investment is incentivised.
Only nodes who perform the work of building blocks and solving the block hash puzzle have the right to agree or disagree about which rules are being enforced.
The most important aspect of this is that the only participants who can play any part in determining the outcome or direction of the network are being paid to do so. There is no altruism in the network and the participants who use their resources most effectively are rewarded long-term.
Largely thanks to the first-seen rule, there is a strong incentive for nodes to have very low latency connections to the most likely subset of nodes to find the next block. This gives the node the best possible chance of making other nodes aware as rapidly as possible of their block discoveries This is another way to minimise the chance of orphan blocks being created.
Incentive driven behaviours in Bitcoin
There are several goals that node operators and other participants in the block creation process will exhibit as a natural response to competing for the rewards on offer. We can break these down as follows:
1. Create dense, high-bandwidth connectivity
The design of Bitcoin is balanced to push node operators to have a dense layer of connectivity to other nodes on the network. These high-density connections are the fabric of the so-called 'Small World Network' within which, each node is connected to a majority of the other nodes using high bandwidth, low latency links, allowing for propagation of transaction and block data at high speed.
2. Develop advanced, highly parallel computing systems
The nature of the system is such that miners are always incentivised to be able to process transactions much faster than they typically arrive on the network to deal with peak events without loss of service. In the event of a prolonged period of lost connectivity, the node must be capable of quickly downloading and validating all of the activity on the network that has taken place on the chain since it went offline to have up-to-date knowledge of the UTXO set.
3. Find higher density and lower cost means of storing data
As the blockchain accumulates data over time, the custodians of that information must constantly expand their storage capacity. This is the case for both live memory systems (e.g. RAM) which store the UTXO set and transaction pools, and for long-term storage systems that hold the full blockchain data and are designed to persist for many years.
4. Find low-cost, high-availability sources of energy
Because proof-of-work is an energy-intensive activity which nodes are required to perform to win blocks on the network, there is a very strong incentive for node operators to be able to access that energy for the lowest possible cost. If they can access their energy at a lower cost, they can find solutions to their blocks more profitably, thereby enabling them to expand their reach and develop a better system.
5. Build a strong and diverse user base
For Bitcoin to be successful long term, the transaction rate must increase to the point that the declining block subsidy is offset by the accumulation of transaction fees, without causing an undue burden to be pushed down upon the users of the network. This requires that a large user base form around the network, which use it for diverse applications to remove any reliance on a particular subset of the population or purpose.
6. Ensure that legal and regulatory support for the network exists
The biggest existential risk to the network comes from a lack of acceptance of it by state-level organisations as a compliant and lawful tool that can be used for commerce and exchange. Ensuring that governments, lawmakers and regulatory bodies understand the network’s function well enough to legislate its use cases gives it the best chance of achieving longevity and persisting as a technology.
The lightspeed propagation of Bitcoin transactions
One of the core innovations of the Bitcoin design is the way it incentivises the rapid propagation of transactions among nodes as a solution to identifying double spends. It is a huge priority for any node that receives a transaction to make sure that every other node knows about that transaction to be aware of if it is the first time the inputs that it uses have been spent on the network.
If a node was unaware that another transaction had already spent the coin there is a chance that other nodes on the network would reject any block they tried to propagate based on it containing a double spent (and therefore invalid) transaction.
By propagating valid transactions as quickly as possible, nodes ensure they have the best chance of seeing the same version of a transaction first as the greatest majority of other nodes. Because of the ultra-dense interconnectivity of the small world network, a double spend introduced to the network any more than a second after the original spend has almost zero chance of being validated by honest nodes.
Ensuring rapid receipt and propagation of new blocks
Part of the incentive for developing the high bandwidth, high-density connectivity at the centre of the Bitcoin network is to enable miners to validate proposed new blocks from other miners in the shortest possible time frame.
This is of vital importance that they validate it as quickly as possible, as the energy that is spent trying to build upon the previous block in the chain is at a very high risk of being wasted if a block is found. A node wants to be able to receive a block that has been found as quickly as possible to conduct its validation, which if successful will lead to them using it as the next block to build upon.
Similarly, if the node finds its valid solution, it needs a means with which to push the block announcement and corresponding transaction list out to every other node it is connected to.
The goal is to ensure that the other nodes in the network become aware of their block as quickly as possible, ensuring that it has the best chance of being built upon and becoming part of the longest chain of proof-of-work.
This is one of the strongest drivers of the formation of the small world network at the core of the network.
Hardware developments to meet user demand
As the Bitcoin network grows, the requirement for nodes on the network to build ever larger blocks will spur the creation of computing systems which are targeted to perform highly specific tasks relating to the validation of transactions and blocks.
The incentives at play will tend to intensify the focus on developing highly parallelised systems that can manage huge numbers of transactions in real-time through a variety of pathways.
Because each transaction may have several inputs being spent at once, and each of those inputs may represent a different script or template, nodes can break each transaction down and funnel inputs using particular template types into specifically optimised pipelines.
When all of the inputs of the transaction have been validated, the totality of the transaction can be evaluated as valid and the transaction can be appended to the node’s block template.
Where the network trends towards there being large numbers of TXs of a particular template or type, the use of programmable silicon hardware such as FPGAs (Field Programmable Gate Array) which are specifically tailored to process transactions using those templates will be developed.
Similarly, hardware that is optimised for the handling of large data, custom scripts and more can be developed to manage the transactional load. Eventually, it will be possible for the silicon that handles the opcodes used in Bitcoin script can be developed similar to those that have been developed to process FORTH instructions directly.
Novel service delivery methods
Using payment channels, Bitcoin’s ability to operate as a network layer means services can now be delivered inside the same financial instrument that will pay for them.
This vastly simplifies payments, making them cheap enough that single-cent transactions become cost-effective to make.
This change will engender a completely new user experience, where payments happen often, but for small amounts. These amounts can accumulate in a payment channel, terminating periodically (e.g. monthly) with a transfer of funds.
Instead of paying upfront for an entire movie to stream, you will be able to pay for what you watch and if you turn it off after a few minutes closing the payment channel will mean you only paid for what you viewed rather than the movie in its entirety as in legacy models.
MinerID is a protocol that allows a node operator to embed information inside the coinbase transaction of each block they win to be associated with a real-world identity.
A minerID is simply a public key from an ECDSA keypair. These keys are used to sign minerID metadata the node adds into a False Return output. The use of ECDSA cryptography to sign minerID metadata (as opposed to generating unsigned arbitrary data) provides data non-repudiation, linking the miner's identity to mined blocks in a reliable way.
MinerID gives node operators a way to provide proof of their activities to regulators and each other. Its use is optional.
Merchant API (mAPI)
Merchant API (mAPI) is an additional service that miners can offer to merchants and network users.
It allows merchants to open direct lines of communication with nodes identified via MinerID to perform services such as:
- Getting fee quotes;
- Submitting transactions;
- Querying the status of transactions.
Node operators run mAPI as a service adjacent to the node itself. It is a value-added service providing user certainty.