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Clearing up misunderstandings about Bitcoin's decentralisation

Jun 08, 2022

The decentralised nature of the Bitcoin network is commonly held forth as one of its primary value propositions and a differentiator that sets it apart from traditional, centralised data management systems.

What is not clearly expressed is the nature of this decentralisation; how the Bitcoin network’s design brings it about, for what purpose, and with which implications.

To clear up this commonly misunderstood concept, we asked Bitcoin Curriculum Specialist, Evan Freeman, to expand on the topic against the backdrop of Bitcoin’s consensus mechanism.

Bitcoin’s consensus directives

Bitcoin 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 white paper, and by managing those directives under a set of rules which are collectively enforced by nodes using 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.’

Built-in compensation removes the need for centralised leadership in Bitcoin

These directives make sense from an operational perspective, but also through the perspective of creating 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 either new transactions or valid block hashes reach other effective network nodes as quickly as possible.

The decentralisation of power in the Bitcoin network

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 to anyone who holds a copy of the ledger, and the 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 for the network are being paid to do so. There is no altruism in the network and the participants who use their resources in the most effective manner 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 sub-set 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.

An introduction to Bitcoin infrastructure

If the topic of Bitcoin mining and infrastructure is within your professional purview, you’re sure to benefit from the BSV Academy’s introduction to Bitcoin Infrastructure course.

This certificate course is focussed on providing students a solid understanding of the role that nodes and node operators play in the construction of the network. In particular, it focuses on the incentives that drive enterprise operators to spend large sums of money to build and operate their infrastructure.

To sign up for this free course, head over here.

Evan Freeman

Bitcoin Curriculum Specialist