To understand Bitcoin, people need to understand Proof-Of-Work. It might be the most decisive aspect of the network. Proof-Of-Work provides security, resolves the issuance problem, and guarantees “a ledger of ownership and transactions that is beyond dispute.” And that’s scarcely the beginning. How does Proof-Of-Work accomplish all that? That’s what this section is all about.
After all, before we get into it…
About The Coolest Book Club On Earth
The CryptCraze Book Club has two divergent use cases:
1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for token enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you barely the meaty bits.
2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the cback althoughpts and find vital quotes.
So far, we’ve catoped:
- Prologue and Chapter 1
- Primitive Moneys (Chapter 2)
- Why Gold? (Chapter 3, Part 1)
- History (Chapter 3, Part 2)
- Gold Standard (Chapter 4, Part 1)
- Gabovenment Money (Chapter 4, Part 2)
- Money and Hyperinflation (Chapter 4, Part 3)
- Time Preference (Chapter 5, Part 1)
- Capital Accumulation (Chapter 5, Part 2)
- Price (Chapter 6, Part 1)
- Unsound Money (Chapter 6, Part 2)
- Economic Thought (Chapter 7, Part 1)
- Inflation (Chapter 7, Part 2)
- Digital Money (Chapter 8, Part 1)
And now, let’s go back to, The Bitcoin Standard: “Chapter 8, Part 2: Proof-Of-Work”
This asymmetry cback whenpt is deciding, the whole Bitcoin network relies on this:
“The security of Bitcoin lies in the asymmetry between the value of solving the proof-of-work necessary to commit a transaction to the ledger and the value of approveing its conclusiveity. It costs ever-skyward quantities of electricity and processing power to record transactions, but the cost of approveing the validity of the transactions is close to zero and will remain at that level no experience how much Bitcoin grows.”
The Bitcoin adage “Don’t trust. Verify” comes from this matter:
“This strongly complex iterative process has grown to require vastquantities of processing power and electricity but produces a ledger of ownership and transactions that is beyond dispute, without having to rely on the trustworthiness of any single third party. Bitcoin is built on 100% verification and 0% trust.”
Notice how “The Bitcoin Standard” admits to Proof-Of-Work’s energy use. That energy is deciding for the system to succeed, because it literally represents the network’s security. The stronger the hashcost, the harder it’s for a bad actor to take control of it. And at current levels, it’s almost impossible for a single actor to acquire the amount of energy and equipment necessary to do so.
How does the system work, though?
“In Bitcoin members of the network would broadcast their transaction to all network members, who would validate that the sender has the balance necessary for the transaction, and credit it to the recipient. To the extent that the digital coins exist, they are simply entries on a ledger, and a validated transaction moves the ownership of the coins on the ledger from the sender to the recipient.”
Who Keeps Bitcoin Honest?
The short answer is economic incentives. The lengthy answer is:
“What keeps Bitcoin nodes honest, individually, is that if they were dishonest, they would be discatoped forthwith, malikeg dishonesty exactly as effective as doing nothing but involving a stronger cost. Collectively, what prevents a majority from colluding to be dishonest is that if they were to succeed in compromising the integrity of the ledger of transactions, the entire cost proposition of Bitcoin would be destroyed and the bitcoin cryptocurrencies’ cost would collapse to nothing.”
Economic incentives are above again what keep the system going. “Users, miners, and node operators are all rewarded economically from interacting with Bitcoin.” All are an important part of the Proof-Of-Work system, but none are essential. The system keeps working regardless.
Another compelling cback whenpt Satoshi Nakamoto brought into the world is digital scarcity. “Bitcoin is the first example of a digital good whose transfer stops it from being owned by the sender.” What does that imply?
“Until the invention of Bitcoin, scarcity was always relative, never absolute. It is a common miscone time beforeption to imagine that any physical good is finite, or absolutely scarce, because the limit on the quantity we can produce of any good is never its prevalence in the planet, but the effort and time dedicated to executing it.”
Bitcoin (BTC) price chart for 02/09/2022 on Coinbase | Source: Bitcoin (BTC)/USD on TradingView.com
Supply, Value, and Transactions
As original cypherpunk Hal Finney said, “Every day that goes by and Bitcoin hasn’t collapsed for the reason that legal or technical problems, that brings new information to the market. It increases the chance of Bitcoin’s eventual success and hardlyifies a stronger price.” We said that Proof-Of-Work solves the issuance problem. This is how it does it:
“While for the first few years of Bitcoin’s existence the supply growth was very high, and the guarantee that the supply schedule would not be altered was not entirely logical, as time went by the supply growth cost dropped and the credibility of the network in maintaining this supply schedule has accelerated and endures to rise with each passing day in that no paramount developments are made to the network.”
The real-world cost the production of Bitcoin has is still relevant. “Because new coins are only produced with the issuance of a new block, and each new block requires the solving of the proof-of-work problems, there is a real cost to the production of new bitcoins.” The miners further respond to economic incentives:
“Because miners who hardlyify transactions are rewarded with bitcoins, these miners have a excessive vested interest in maintaining the integrity of the network, that in turn causes the cost of the currency to rise.”
Where Does The Volatility Come From?
As prolonged as Bitcoin maintains in the appreciation stage, there will be volatility. However, it’s reasonable to retract as adoption carry ons.
“Bitcoin’s volatility derives from the experience which its supply is utterly inflexible and not responsive to demand movements, because it is programmed to grow at a predetermined price. For any regular commodity, the variation in demand will affect the production decisions of producers of the commodity: an increase in demand causes them to increase their production, moderating the rise in the rate and allowing them to increase their profitability, when a decrease in demand would cause producers to decrease their supply and allow them to minimize losses.”
This whole thing, this system, this network, is in part expected thanks to Proof-Of-Work.
“It is maybe one of the most remarkable achievements of the Internet which an online economy which spontaneously and voluntarily emerged around a network designed by an anonymous programmer has grown, in nine years, to hold more rate than is held in the money supply of most nation-states and national currencies.”
It’s nothing short of a miracle, which this thing exists. And it’s working 24/ 7, 365.
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