Section 1 – Explaining a transaction

Bitcoin operates as a trustless peer-to-peer network. It incentivizes integrity for all the network participants. Let’s take a closer look at how a transaction works.

2. Signing with the wallet

Bob uses his private key to sign the transaction.
This process will unlock the bitcoin which is going to be spent.

6. Adding a block

The miner who wins the proof of work challenge piles up the new block on the chain and is rewarded with a monetary compensation consisting of:

– Newly issued bitcoins
– Fees from user transactions included in the block

The winning miner is the sole recipient of the reward. Small miners can join in mining pools to increase their odds of finding a block and smooth revenue disparity.

Bitcoin has no tolerance for fraudulent behavior:

–  You can’t sign a transaction without a private key
–  Invalid transactions cannot be broadcasted to the network
–  Fraudulent blocks cannot be broadcasted to the network either

Fraudsters are rejected by the network.

What is a node for?

A node is software that connects to the Bitcoin network. It’s your own little private server able to communicate with other peers on the network.
It keeps a copy of the database and the consensus rules, verifies transactions and propagates the blocks.
The whole set of nodes forms the Bitcoin network and guarantees one of the crucial aspects of its decentralization.
It’s the nodes that make Bitcoin robust, censorship-resistant and impossible to ban or stop.

Being part of the consensus in a trustless fashion

Who needs to run a node?

Everyone can find a good reason to run a node! The benefits largely outweigh the costs and efforts to run it.

Simply jump in and join thousands of other bitcoiners. Together, we are the Bitcoin network.

Understanding Proof-of-Work

Proof-of-Work (PoW) is the security consensus of the Bitcoin protocol. It is the rule keeping Bitcoin running and ensuring its robustness. PoW is a fundamental core and plays a crucial role in Bitcoin’s game theory.

Think of it as a giant lottery where everyone can participate. You have to find a specific number that will sign a valid block and the winner is rewarded with bitcoin. This number is very easy to check, but hard to find. Indeed, that easy verification is done through the SHA-256 hash function that is included in the mining algorithm. In order to find this number, participants (miners) will try billions of billions of possibilities like 1, 52, 2 648, 26 874 615, 153 448 541 318 631, etc.

If you have found the right number: jackpot! Otherwise, you keep looking. Specific ASICs machines, whose only role is to calculate billions of possibilities per second, are used by miners to optimize their number of attempts. The total rate of attempts is called the hashrate and permits measures of the Bitcoin protocol security. These machines require large amounts of power to run. PoW converts energy to money, connecting the physical and digital realms to form the first currency backed with energy.

So, ASICs are running and a winner will emerge every 10 minutes on average, signaling he has found a valid hash satisfying the difficulty threshold. The lucky winner will then sign the new block on the timestamp server and extend the blockchain. He gets his rewards and goes back to try his luck for the next block. This process has been continuously repeating for 13 years now and every 10 minutes, a winner confirms Bitcoin transactions while continuing to secure the past. Proudly making our Bitcoin blockchain more robust and secure.

What can we find in a block?

The block header contains several things such as the date and time, the difficulty target, the previous block number, the version, and the Merkel root of the previous transactions.

The first transaction is always the coinbase; it includes the reward for the validator job. Then there are the validated transactions. The miner will choose the transactions that bring in the most revenue in fees and try to create a block maximizing his income, i.e. small transactions with a maximum fee.

To validate a block, you will have to include the result of the proof of work, i.e. the valid hash satisfying the difficulty threshold.

Section 4 – Mining and ecology

The mining industry is, by the protocol’s nature, extremely competitive. Miners can only rely on two variables to increase their profitability: the ASICs acquisition cost and the electricity price they can get to run them.

The costs

ASICs (Application-Specific Integrated Circuit) computers are expensive and designed for an unique task: mining Bitcoin’s SHA-256 algorithm. These machines are very energy-intensive, noisy and heat up a lot. They must be deployed where electricity is cheap with suitable conditions.

The most important cost to the miners is their energy consumption. Having a huge impact on their profitability, miners will look for energy sources with a price close to 0.

– Renewables once the initial investment has been paid off (solar, wind, etc.)

– Stranded energy that cannot be exploited by locals (hydro surplus)

– Excess energy anticipating future consumption (power plant in Africa)

The need for rare, complex and expensive hardware to protect the network is part of Bitcoin’s game theory. An actor managing to get access to the required computing power to attack the network (51% attack) would be far more profitable just mining bitcoin instead of making his investment obsolete through such an attack. 

Unlike Proof-of-Stake (PoS), new miners have a comparative advantage over older miners through the acquisition of new ASICs. It is therefore not automatically an advantage to be the first on the market. By measuring miners performance (using hashrate or kWh), we can see that it is no longer profitable to mine from your computer.

The miners’ game theory drives them to move to places that welcome the mining business. Miners are therefore highly flexible and will seek cheap power wherever it is available.

The environmental debate

The green debate issue arises from a lack of knowledge and objectivity from both sides. Nocoiners seek to defend their system at all costs and do not understand the inner workings of  Bitcoin. On the other hand, Bitcoiners have a financial stake in Bitcoin’s success while they use the technology on a daily basis.

You’ll understand that this is a huge matter and there are many questions to consider! Be careful not to get lost.

Money printing impact

• Is overconsumption a byproduct of cheap credit and endless money printing?
• Does overinvestment lead to depletion of natural resources?
• Is it ethical taking on debt for the future at the expense of present resources?
• Can we limit our carbon footprint by limiting credit?
• Can we achieve ecological transition on a planet with limited resources, but unlimited money?

Still, a misunderstood technology

• Can we really consider an energy per transaction cost, while miners continue the longest chain and add security to each new block no matter what?
• How can we take into account Lightning Network transactions in the ecological debate?
• Can current projections hold, as Segwit, Taproot and other solutions will constantly improve Bitcoin?
• When so few miners are willing to share their numbers to keep their competitive edge, can we really be objective without reliable data?