Why is Bitcoin able to reach consensus in practice despite this being a generally difficult problem?...

Why is Bitcoin able to reach consensus in practice despite this being a generally difficult problem?

A) Bitcoin can solve Byzantine generals problem

B) Only small groups of nodes have to reach consensus rather than the network having to globally reach consensus

C) The order of blocks doesn’t matter for consensus

D) Financial incentives cause participants to work together

Solutions

Expert Solution

Why is Bitcoin able to reach consensus in practice despite this being a generally difficult problem?

A) Bitcoin can solve Byzantine generals problem

B) Only small groups of nodes have to reach consensus rather than the network having to globally reach consensus

C) The order of blocks doesn’t matter for consensus

D) Financial incentives cause participants to work together

Option (D) Financial incentives cause participants to work together is correct because bitcoin miners also earn fees from transactions. Every transaction may include a transaction fee, in the form of a surplus of bitcoin between the transaction’s inputs and outputs. The winning bitcoin miner gets to “keep the change” on the transactions included in the winning block. Today, the fees represent 0.5% or less of a bitcoin miner’s income, the vast majority coming from the newly minted bitcoins. However, as the reward decreases over time and the number of transactions per block increases, a greater proportion of bitcoin mining earnings will come from fees.

The word “mining” is somewhat misleading. By evoking the extraction of precious metals, it focuses our attention on the reward for mining, the new bitcoins in each block. Although mining is incentivized by this reward, the primary purpose of mining is not the reward or the generation of new coins. If you view mining only as the process by which coins are created, you are mistaking the means (incentives) as a goal of the process. Mining is the main process of the decentralized clearinghouse, by which transactions are validated and cleared. Mining secures the bitcoin system and enables the emergence of network-wide consensus without a central authority.

venereology answered 6 months ago

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