Open Questions About Bitcoin’s Nakamoto Consensus

It’s natural to make simplifying assumptions about technology; such abstractions let us build on top without dealing with exponentially increasing complexity. But it’s worth revisiting our assumptions occasionally, particularly when they’re yet to be proven.

Is It Sufficient?

Bitcoin works by nodes validating transactions (economic actors), and tie-breaks between valid alternatives being provided by Proof of Work (miners). The state is kept as small as possible to reduce barriers to entry in mining; the constant supervision of nodes provides economic incentives for miners to create valid blocks, the slow reduction in subsidy (in favor of fees) provides incentive for miners to fill blocks.

This structure is designed so that the little power that miners have (to censor transactions) is unlikely to be abused, as it would require collusion and be unprofitable.

It’s still unclear that this is sufficient to maintain decentralization. If one actor controls or influences the majority of Work (as has been in the past, and may be now), we’re relying solely on economic incentive to keep that actor well-behaved. Relying on the judgment of one company or individual is far from decentralized! And it’s unclear that the economic incentive is solid: there are numerous external reasons why losing bitcoin might make money overall.

Maybe mining will again become more decentralized, but maybe the nature of hardware means that it’s a natural monopoly: the determinant then is whether the ecosystem agrees on the need for decentralization, how much, and what it’s worth.

Of course, the system also fails if nodes do not check the rules, or are centrally controlled, or can be induced to change the rules by miners (“ we will freeze your coins unless you agree to this fork”). Economic node centralization is less of a clear current threat than mining centralization, but it’s possible.

Is It Necessary?

If you think the above isn’t a problem, or merely transient, you need to ask another question: is Nakamoto Consensus necessary? Maybe the world simply wants a non-government currency option: Maybe a set of trusted actors controlling a centralized coin is sufficient. Or maybe it’s enough to have a disparate range of currencies, each flawed and compromised in their own way, but easily tradeable?

Or perhaps the existence of bitcoin will be enough for some government currencies to move to a Chaumian-style model to compete: still centrally issued, but no longer centrally controlled?

Is It Worthwhile?

There’s a real cost in creating and running mining equipment; even though most mining comes from soaking up excess green power, that’s still a cost. As is the brainpower which could be doing other things to help humanity, and the cost of creating a cryptocurrency industry dominated by scams of various types.

Is Nakamoto Consensus worthwhile? Is Bitcoin worthwhile? I believe it is, but that’s more a point of optimistic faith than a certainty (even if it fails, we will have learned something valuable).

I don’t have enough data to answer this: perhaps when bitcoin is 25 years old we can evaluate it. Until then, remember that anyone claiming certainty on any of these questions should be treated with suspicion.