Nakamoto Consensus is upon us! All hail!

With the first real hash vote ever to occur in Bitcoin Cash set to occur in less than 10 days, it’s time to take a step back and really take in the enormity and the significance of this event.

We are literally seeing the FIRST practical application of a mass decentralized consensus system (aka ‘vote’) that needs no administrator, no organization, no coordination, no public debate, no polling stations, nor any face to face meetings! It is Nakamoto Consensus, as Satoshi created it. It itself is a pure system. Like the evolution of life, it needs no coordinator. Nobody tells a honey bee how to build the cells in the hive. Nobody tells each ant what to do or manages its daily work schedule. Nature just figures this out by way of naturally finding the most efficient solutions. But humans are a strange creature. We like to think. We rationalize. We are a social animal, and as such, we are predisposed to rely on social consensus systems. We create rules for ourselves, and we like to negotiate these rules amongst ourselves so that everyone concerned feels like their individual needs were considered, for a common sense of enfranchisement.

But Nakamoto Consensus doesn’t work like that. It, like mother nature, has a very simple rule: those who behave in a coordinated way that benefits the network will profit more than those that defy consensus. Its as simple as that. The only remaining thing we need to add to that formula to make it all work is the simple assumption that people tend to want to be profitable, rather than not. With that one simple assumption, the automatic consensus system is complete, and we can rest assured that consensus will be obtained, passively, automatically, without supervision or orchestration.

Well, at least in theory. That is the idea of how it will work, but because Nakamoto Consensus is a ‘natural’ system, it is very hard to analytically work out exactly how long the consensus process will take in practice. There are just too many variables that factor into this equation to model, and much like trying to predict the market, which is the sum aggregation of millions of independent decisions being made by individuals, it is not trivial. That is what makes what will happen on Nov 15th very interesting to those of us who have been in Bitcoin for years, but have never been able to witness how well it holds up in defending against competing protocol changes via a hash vote.

As is the case for most natural phenomena which have yet to be well understood, there is no lack of theories concocted by pundits on all sides on whose votes actually count in such a hash vote. Their arguments generally fall into one of the following categories:

Individual Nodes decide

This is the belief that a majority of the nodes in the network (ones run by individuals like you or I) collectively decide what the network will accept as protocol changes. This is of course, a fallacy, because it is only in the extreme case where all nodes of the whole network were controlled by a collective power would all the nodes be able to rob the dissenting miners of the value of the rewards that they mine. This is of course an impossible situation on premise alone as the assumption is that the nodes are individually controlled. If we had a system that could coordinate the collective behavior of all the individual nodes in the network, then we would have no need for a decentralized consensus system in the first place. This misguided belief was the origin of the “UASF” movement, which was a grass-roots lobbist group which tried to convince the market that the node population (the common man) had enough power to influence network changes. They were never given a chance to be proven wrong, unfortunately, as after the NY Agreement, the supporters of big blocks conceded to split off into BCH instead of forcing the fork.

The ineffectiveness of individual nodes and their irrelevance to the network was later demonstrated when researchers confirmed that the Bitcoin network was a small world network, (one in which the number of average hops between any given 2 nodes was less than 3) and that most important connections exist between mining pool nodes. If individual nodes wish to partition themselves from the network it would not affect anyone else but themselves.

Economically Significant Nodes decide

This is the idea that nodes of exchange businesses, wallets or otherwise ‘economically significant’ players in the community have a vote in the decision. This believe isn’t too far fetched. In reality, exchanges have some influence as the decision of whether or not to trade a split coin is in the hands of each individual exchange, and the decision to support a given upgrade fork of a blockchain is made by every wallet service provider.

The belief though that their opinions influence a hash vote, however, is less grounded in reality. In truth, although they are well within their rights to provide whatever service they wish to the public, using this support (or threat of withdrawing said support) as leverage during a hash vote is nothing but posturing. Exchanges and wallet service providers are businesses. (With exchanges having to further operate under strict regulatory regimes). If the market demands a service, someone will provide it. But as they are not miners themselves, they will have no way to provide the security support needed for a minority fork chain. Without this it would be very risky for them to provide services to their customers, but it is entirely up to them.

Developers decide

This is the biggest misconception in the industry. It is the myth that the developers that maintain the blockchain client code are the ones that control or influence the decisions to be made on the network. This is the model that most of the legacy bitcoin (BTC) developers operate under, (even though they will deny it themselves). Developers see themselves as the defacto ‘stewards’ of the system, and thus, their opinions should matter the most in guiding what the market and community should expect in terms of features or changes to the network. They use security and network integrity concerns as a basis for this claim, in which they convince the community to ‘leave it to them’ as they know what’s best for everyone. It is very much the nanny-state mentality, or a technocracy. The idea is that this does not devolve into an abusive dictatorship so long as no contentious changes can ever be approved by all developers. Unfortunately, it also ensures that needed changes or upgrades can never make it in either, as there will always be at least one developer to veto (perhaps maliciously) any change request.

Notable personalities decide

This is a slight variation on the case above, where the notable ‘luminaries’ or visionaries, are seen to hold more influence over the system direction than others. This is the model seen in Ethereum presently where Vitalik Buterin (one of the original founders of the project) is seen to have undue influence over what changes are allowed into the project. The power of such leaders was demonstrated when the DAO roll back hard fork was initiated and which produced Ethereum Classic (ETC). The dangers of this system of course is that it can easily devolve into a dictatorship, albeit a benevolent one.

Mining Pools decide

Most people make the mistake of thinking that the mining pools count in the hashpower vote, and this is an understandable mistake. That is because when people ‘see’ the miners of a blockchain, what they are actually seeing are the mining pools. The mining pools are actually just service providers. They run networks and server nodes and they maintain the ‘miner network’ that most people think of when they imagine the backbone of the blockchain. Indeed, it is between these pools that the small world network that has been much talked about actually exist. When blocks are found, they are found by the mining pools, and they are communicated the quickest among the pools. However, these companies, are not the ones that have a vote when it comes to a hashpower vote. If the power to vote belongs to ‘citizens’ of a country, then the mining pools are the companies in a country. They only provide the infrastructure of the network so that the true citizens of the Bitcoin ecosystem can participate in the network. It is true that without them, there would be no way for the network to operate, but if they were to act in a way that defrauds the network’s constituents, or if they are not faithful to the wishes of the hashpower constituents, then hashpower will leave them and they would be out of business.

Hashpower decide

Hashpower is the true decider in a hashpower vote. That is to say, those that own the hashpower production assets are the only ones that have a vote in a hashpower election. They decide which mining pool to build blocks for, therefore they effectively decide which chain in a fork to build upon. They have the most skin in the game (collectively) because they are the ones that have committed 100% risk capital to the success of the blockchain and the appreciation of the coin. Data centres can be re-purposed, servers can be re-sold, coins can be dumped for others, but the only thing that becomes worthless scrap if the blockchain fails is the ASIC mining assets. They cannot be repurposed, and therefore they must be written off as losses. As it is, the industry writes down mining assets to zero after just 2 years of depreciation. If they don’t make back their value in 2 years or less, then the business may as well have thrown their money into a bonfire. That is the fundamental reason why hashpower are the only ones that you can be assured of to care the most about the long term value proposition of the blockchain that they are mining, and the reason why they are the ones that can be trusted to make the best decisions for it. Their vote is weighted in proportion to the amount of hashpower that they own. The larger the portion, the bigger vote they have and the more influential they are. (and subsequently, the more invested they are in ensuring the maximal value be realized on the blockchain).

At present, the only (known) mining pools that own their own hashpower at present are:

Coingeek

BMG

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