Evolutionist,
We continue our examination of the Bitcoin White Paper, released by Satoshi Nakamoto in October of 2008, focusing on section six, the incentive.
This is the essential part of the white paper and the true magic behind Bitcoin! Satoshi knew that humans couldn’t be coerced to run the network honestly, especially when money was on the line, so he instituted an incentive to keep nodes honest.
Humans work best when they are incentivized. Think about it. If you are promised a bonus for hitting specific goals in the year, do you not aim for those goals? Naturally, we all do. We all want the prize.
Satoshi needed to find a way to incentivize nodes to remain honest and a way to issue coins without the need for a central authority. The incentive became the transaction fees that go into each block and the block creation reward of new coins. Satoshi believed that the sum of these two incentives would be more financially lucrative than attacking the network and trying to steal back previously spent coins. It makes sense for nodes; it literally pays more to be good than bad.
I believe the best human incentive is a financial one, and so far, Satoshi was also correct in his assumption. It has been thirteen years for Bitcoin, and no attacks.
For more information, click on the illustration below or one of the links to previous newsletters in this series.
The Bitcoin White Paper Series:
#4 - Section: Timestamp Server
To the moon!
Bitcoin: A Peer-to-Peer Electronic Cash System
Incentive
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.
The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.
QR Code: A scannable code that, in the context of Bitcoin, often represents a bitcoin address, resembling a barcode.
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