Blocks and Bitcoin in behavioral concept photo

Incentive-driven behaviours built into the Bitcoin network

Jun 14, 2022

In a recent blog on Misunderstandings about Bitcoin’s decentralisation, Bitcoin Curriculum Specialist, Evan Freeman expanded on the topic against the backdrop of Bitcoin’s consensus mechanism.

Evan concluded that Bitcoin’s built-in compensation mechanism removes the need for centralised leadership in Bitcoin. Following network’s directives does not only lead to the decentralisation of power, but also to the spontaneous creation of a ‘Small World Network’ that enables the light-speed propagation of transactions.

In today’s blog, Evan dives into the incentive-driven behaviours built into the Bitcoin network, as a preview of the content you can expect from our introductory course to Bitcoin Infrastructure.

The introduction to Bitcoin Infrastructure course is focused on providing students with a solid understanding of the role that nodes and node operators play in the construction of the network. In particular, it will focus on the incentives that drive enterprise operators to spend large sums of money to build and operate their infrastructure.

Incentive-driven behaviours leading to Bitcoin’s light-speed network

Largely thanks to the first-seen rule, the Bitcoin network offers 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.

There are a number of 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 which allow for propagation of transaction and block data at high speed.

 

  1. 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 in order 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 the activity on the network that has taken place on the chain since it went offline in order to have up-to-date knowledge of the UTXO set.

 

  1. 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.

 

  1. Find low cost, high availability sources of energy

Because proof-of-work is an energy intensive activity which nodes are required to perform in order 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 are able to access their energy at lower cost, they can find solutions to their blocks more profitably, enabling them to expand their reach and develop a better system.

 

  1. Build a strong and diverse user base

For Bitcoin to be successful long term, the transaction rate must increase to the point that the 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 and use it for diverse applications in order to remove any reliance on a particular subset of the population or purpose.

 

  1. Ensure that legal and regulatory support for the network exists

The biggest existential risk to the network comes through a lack of acceptance of it by state level organisations as a compliant and lawful tool that can be usable for the purposes of 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.


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.

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

Evan Freeman

Bitcoin Curriculum Specialist