“Bitcoin Mining Demystified” is a presentation given by Andreas M. Antonopoulos via video conference at Lab111’s Cinema to celebrate Coinfest during Bitcoin Wednesday on 6 April, 2016. Mr. Antonopoulos is one of the world’s leading authorities on Bitcoin and the blockchain. A detailled profile of Mr. Antonopoulos can be found here.
“In the marketplace there is a lot of noise and very little understanding of how the fundamental capabilities of Bitcoin arise out of its proof of work algorithm. We’ll see a lot of consensus suggestions and quite honestly a lot of them are not going to work and a lot of them are bullshit that will make a lot of consultants rich selling bullshit to banks.”
In the first half of the video Mr. Antonopoulos gives a clear explanation of Bitcoin mining and the halving. He also debunks many of the common misconceptions around mining and proof of work which he calls one of the least-understood and yet most central elements of the Bitcoin blockchain. After a short break, he answers two interesting questions from the audience, the first about proof of stake and alternative consensus mechanisms, the second about the relationship between Bitcoin and Ethereum.
In this video he is introduced by Trent McConaghy, the CTO of BigChainDB.
- The halving at 9’00”;
- Proof of stake and alternative consensus mechanisms at 15’30”;
- The Lightning Network as Bitcoin’s first proof-of-stake system at 17’00”;
- Closed blockchains and private ledgers including his statement about selling bullshit to banks quoted above at 19’00”;
- Whether Ethereum is a threat to Bitcoin’s dominance in the industry and the possible relationship between the two technologies at 20’53”;
- Bitcoin’s Scalability Issues Compared to Ethereum’s at 22’43”, and
- Bitcoin’s niche as a reserve currency at 27’52”.
Hi, so it’s my pleasure to introduce Andreas. He probably needs no introduction, but I will introduce him nonetheless. Andreas is probably the greatest speaker in the Bitcoin or blockchain world or at least one of them, and he can talk at the very highest levels about the value of Bitcoin and blockchain technology. But he also can dive down super deep all the way down to the lowest levels, the ‘nitty gritty’, and not only talk about it but explain it extremely well in the books that he has written, in the talks he has given, and so on. So I guess without further ado, Andreas Antonopoulos, take it away.
Well, I can’t hear anyone, so I don’t know if you can hear me. Here it comes up. Can you hear me? So yeah, okay. Fantastic, great.
Well, today we’re talking about mining, and we’ll call this talk ‘Mining Demystified’. The main idea here is to talk about mining which is probably one of the most obscure aspects of Bitcoin and one of the things in Bitcoin that is the least well understood.
And so, if you look at Bitcoin, then what is the magic technology behind it, which is the technology that actually gives us the features that we care about in Bitcoin, that gives us decentralization, borderless access, and the ability to innovate without permission.
Magic Technology Behind Bitcoin
So the answer to that, as we’ve heard all throughout 2015, is that the magic technology behind Bitcoin is blockchain. Well, I’m sorry that’s wrong. Blockchain is not this magic technology. In fact, blockchain on its own is not a particularly interesting technology. The really interesting technology behind Bitcoin that gives us all these really magical properties is the consensus mechanism of proof-of-work, which creates the blockchain.
The blockchain is really just an artifact. In fact, the consensus mechanism is what you produce through consensus, and looking at the product rather than the process is a classic misunderstanding in engineering. The product, the blockchain, is not that interesting. What it produces, the decentralized consensus for proof-of-work, is, in fact, the interesting part of Bitcoin. And it’s interesting because by producing this decentralized artifact of blockchain through a decentralized consensus for proof-of-work, we are able to create special capabilities or features.
What Gives Bitcoin All Its Features
Bitcoin is immutable because of proof-of-work, and Bitcoin is unforgeable because of proof-of-work. Bitcoin is decentralized because of proof-of-work, and Bitcoin is open and borderless because of proof-of-work, not because of the blockchain. Proof-of-work, or mining as we have it, so mischaracterizes it; it’s a terrible word because it brings to mind men covered in coal with pickaxes, and that’s hardly a good image for the most technologically advanced form of currency.
Mining is the thing that provides Bitcoin’s capabilities. So when you hear the conversation today, it seems like mining is the nasty pointless side effect of Bitcoin. We don’t want it, but is it possible to do it without using so much electricity? We know these people in China look after it, and we know what their government wants to do, and nobody understands how it works anyway, so can we get rid of it and instead focus on blockchains without mining? That is precisely what the banks are trying to do. But of course, I’m missing the point because you can’t get these features without mining.
The Power of Proof-of-work
You don’t get any immutability-specific scenarios. Maybe it will help us understand those who are saying that it’s not decentralized or it’s not as immutable because if you get 51% of the mining capacity, you can modify the blockchain. But that’s not exactly true because even if you had a 51% of the hashing power or even 99 or a hundred percent of the hashing power, you still can’t produce blocks without proof-of-work, you still have to produce proof of work that’s part of the census validation rule, so no one in the network will accept your blocks — even if you have 1% of the mining power — without producing proof-of-work and that proof-of-work costs time and electricity.
If you want to fabricate or forge blocks or rewrite the past, rewrite history, or change something immutable, you have to produce proof-of-work. Even if you have 100% of the hashing power, you still have to produce proof-of-work, and that means that you’re competing with everybody else on the blockchain.
Let’s say you have 90%, so nine-tenths of the total hashing power, then you are competing against the other ten percent. That means that in the time that it takes the additional 10% to work, the best you can produce is nine blocks which means that you can modify the history back about nine or ten blocks of the past which is an hour and a half. Hence, you can account for an hour and a half if you put all of your efforts into modifying the past rather than censoring the future, so the Bitcoin blockchain’s proof-of-work is very strong and valuable.
Clearing Mining Myths and Misconceptions
It is practically impossible to modify those two hours of work once it’s been laid down, and it is inconceivable to go back and change 144 blocks, which is one day of the blockchain. It has nothing to do with who controls the hashing power or how much hashing power they control. Even who is older than the hashing power or even if you have 100%, you still have to produce proof-of-work.
The other big misunderstanding about mining is the idea that the purpose of mining is to create new coins, and again that is a massive misunderstanding. Making more things is the side-effect of mining. It’s a convenient way to control the issuance of new coins, and it is an integral part of the game theory and the system that keeps miners honest, but creating coins is not the point.
Bitcoin’s Volatile Nature
As evident from Bitcoin’s record, we’re going to see a lot of price volatility in the future too, and this is predictable. Still, many people speculate about Bitcoin going down and Bitcoin going up. They’ll see the slightest change in the price impacting trends. Then they’ll buy or sell according to this speculation and cause the exact competitive movements they imagined until those are not sustainable; then they reverse. This causes an up and down roller coaster ride for maybe a few days or weeks.
Alternate Methods of Reaching Consensus
Proof-of-stake is an exciting alternative as far as other innovations in alternative methods of consensus are concerned. And these are now a very vibrant and exciting area of research in computer science and distributed systems. And we’re going to see a lot of developments in the space around consensus algorithms. For the time being, none of the other consensus algorithms are as well tested at scale as Bitcoin is, and we have repeatedly seen that building alternative consensus algorithms is difficult.
So, it will be exciting to see if we can build alternative consensus algorithms. Proof-of-stake has its unique challenges, different from the difficulties of proof-of-work. Still, proof-of-stake can likely, under certain circumstances, provide many of the same benefits that proof-of-work does, such as immutability, unforgeability, decentralization of validation, open access, open innovation, and of course, censorship resistance.
Will Ethereum Dominate Bitcoin?
It’s important to understand that Ethereum is not intended to do many of the same things that Bitcoin does. Its primary focus is on being a stateful blockchain that carries contracts. And in doing so, Ethereum makes some design compromises and trade-offs that are different from the design trade-offs that Bitcoin makes.
While Bitcoin uses a limited and simple scripting language, Turing incomplete, in order to provide very robust security, Ethereum aims to have a Turing-complete smart contract language that is much more flexible for executing smart contracts. While Bitcoin has some scaling issues attempting to solve decentralization problems through the global distribution of a single blockchain artifact, Ethereum has that problem only by some order of magnitude worse because the amount of data that is being stored is far more significant, and arguably solutions that are being suggested such as sharding are yet to be proven.
In the end, Ethereum is best at smart contracts, and Bitcoin is best at creating robust, simple, and very effective scalable security as a reserve currency and a robust immutable ledger. Those two things are not easy to develop, and one in one solution, they are almost opposed in their design considerations. I also think a lot of this is about misunderstanding how scaling works. People who are worried about Bitcoin scaling and then see Ethereum as a darling probably don’t understand that Ethereum’s scaling problems, though different from Bitcoin’s, are just as big and perhaps even more significant.
The bottom line is that the choices Bitcoin has made are very suitable for what it is. It’s not facing competition from other systems either because they can differentiate enough to provide a significant value increase and beat the network-affected early-mover advantage that Bitcoin has, or because they differentiate enough and are not direct competitors of Bitcoin, as is the case with Ethereum.