Here is the next installment in Parker Lewis’ extraordinary Gradually, Then Suddenly series of blog posts.
This one is a home run. This might be the best explainer of Bitcoin proof-of-work I’ve seen, and, in particular, how miners operate in a game-theoretical equilibrium in which they are incentivized to cooperate by providing a security and transaction ordering/timestamping service to the network or suffer economic loss.
In aggregate, Bitcoin miners provide computing power (read: network security) thousands of times greater than all of the worlds supercomputers combined. Due to the asymmetry of hash functions, proof-of-work is difficult to compute, but easy to verify. So easy that a user running a full node on a dinky Raspberry Pi can validate their proof-of-work and add the proposed block to the blockchain, or reject it if they cheat.
Once you grok all of this, the overwhelming beauty of it may bring a tear to your eye: an open network in which participants compete to provide a service to the network in exchange for an economic reward, and are regulated only by users running full nodes that enforce consensus rules and the sheer gravity of economic incentives. No authorities, no middlemen, no coercion. And everyone benefits. Beautiful.
This can be a little difficult to understand at first (hell, Vitalik Buterin created proof-of-stake because he didn’t fully understood proof-of-work as explained in this article), so if you have any questions, feel free to email me with any questions.
Of equally importance, this article gets down to the crux of why Bitcoin and not blockchain:
A blockchain on the other hand is simply an invention native to bitcoin that enables the removal of trusted third parties. It serves no other purpose. It is only valuable in bitcoin as a piece to a larger puzzle and it would be useless if not functioning in concert with the currency. The integrity of bitcoin’s scarcity and the immutability of its blockchain are ultimately dependent on the value of the currency itself. Confidence in the aggregate function drives incremental adoption and liquidity which reinforces and strengthens the value of the bitcoin network as a whole. As individuals opt in to bitcoin, they are at the same time, opting out of inferior monetary networks. This is fundamentally why the emergent properties in bitcoin are next to impossible to replicate and why its monetary properties become stronger over time (and with greater scale), while also at the direct expense of inferior monetary networks.
Ultimately, a blockchain is only useful in the application of money because it is dependent on a native currency for security. Bitcoin represents the most secure blockchain by orders of magnitude. Because all other blockchains are competing for the same fundamental use case of money and because bitcoin’s network effects only continue to increase its security and liquidity advantage over the field, no other digital currency can compete with bitcoin. Liquidity begets liquidity and monetary systems tend to one medium as a derivative function. Bitcoin’s security and liquidity obsoleted any other cryptocurrencies before they left the proverbial gates. Find me a cryptocurrency that comes close to bitcoin relative to security, liquidity or the credibility of its monetary properties, and I will find you a unicorn.
Enjoy!