Dissecting Bitcoin: Whitepaper[1]

To access the dissecting bitcoin: Whitepaper[0], please follow the below link:
Dissecting Bitcoin: Whitepaper[0]

Now, as we move forward toward the concepts described in the whitepaper, here is the link and the entire whitepaper for the reference and ease of the reader:

Bitcoin Whitepaper

Now, let us explore the various characteristics of the network built upon the blockchain rules governed in the bitcoin ecosystem.

Rules of Bitcoin:

The rules state that the new transactions are to be broadcasted to all the nodes. By the implementation of the proof-of-work mechanism, each node then fetches its POW and then broadcasts the block to all nodes. The block is accepted by all nodes after the legitimacy check of the transactions in the block. The acceptance of the block is then expressed by the efforts in the creation of the next block in the chain which is built upon the hash of the previous block.

An interesting fact to be noted here is that the longest chain is always considered to be the accurate one and the nodes function to extend the longest chain. This guarantees the security and functionality of the network and creates an acceptable standard across all the nodes of the blockchain.

Let us assume a scenario where node B and node C broadcast different versions of blocks simultaneously which results in different blocks being received by other nodes in the network. In such cases, the other nodes begin extending the chain based on the first block they receive but do store the other block. The confusion in the network is broken when the next proof of work is received. If the block sent by node B receives the next proof-of-work, all the nodes working on the block sent by node C switch and start working on the block by node B while extending the chain. As stated above, the nodes consider the longest chain to be accurate. Thus, the chain with node B’s block is considered as the accurate chain.

Node Incentives on Bitcoin:

Now, let us dwell on the incentives and perks delivered to the nodes involved in the chain. The basic process of money used in our centralized world can be summarized in one line: “Banks print it, we use it”. But in the case of Bitcoin or cryptocurrency in general, there is no central authority and thus- the addition of coins is achieved through the CPU time and electricity expended.

If we own equity in a startup, we would like the startup to grow and prosper as it will result in our financial benefits. In the same way, the first transaction in a block creates a new coin. The block owner holds the coin’s value and such a mechanism adds an incentive to the block creators as they are credited with the proof-of-work and a value for the first transaction in the block.

Bitcoin Mining:

In the whitepaper, this bitcoin mining process is described as analogous with the gold mining process which can be analyzed more deeply to understand the phenomena lucidly. In a gold mine, the miners use resources to mine gold and add gold to the circulation. In the case of bitcoin or cryptocurrency in general, the miners use computation resources to mine or create virtual currency to add them to circulation. An individual can then trade gold according to the demand and supply of gold in the market and can profit from them. Cryptocurrency traders can trade cryptocurrency in the market based on the market sentiment and the number of coins in circulation.
An intriguing aspect is the transaction fees which can be used to fund the incentive for the network.

Tx_fees = Input value of the transaction-Output value of the transaction.

A decided amount of coins in circulation will effectively transform the incentive model to be based entirely on transaction fees. The transaction fees are also referred to as the gas fees paid to the miners as discussed above.
This concludes our discussion on the Incentive and Network characteristics of Bitcoin. The last and perhaps the most potent article discussing privacy, verification, and disk space with several other topics will be the last bit exploring the origin story of bitcoin. I wish I could send you flowers for being such a fascinating group of readers. Do let me know suitable topics worthy enough to inflict pain on my keyboard.