There is currently a lot of misinformation around incentives and what role they play within Bitcoin. The incentives that work within the Bitcoin system are probably the most powerful, yet most poorly understood facet of the system. I previously made a tweet thread that briefly explains the incentives for each type of ecosystem participant and the balance that they create...

That thread goes a little way in explaining incentives but recently I have seen an increase in comments such as this...

I felt that this needed it's own post to fully explain this, as twitter is not suitable for such a complex but important topic. So the point I have issue with is this..." you KNOW what their motives are. " " Knowing their incentives you can trust that the system will work. " This seems to be true but is in fact false. You cannot know what anyone's motives or intentions are. I will repeat this again because it is so fundamental.

You cannot know what anyone's motives or intentions are.

With regards to miners, what you can know is SOME of incentives that they have. Those specific incentives are that they own:

1.A) mining hardware...OR...

1.B) mining contracts and

2) Bitcoin Cash holdings.





You cannot know ALL incentives and therefore motives. You can only know the incentives that you can know. Let's have a deeper look at the knowable incentives above.

Mining Hardware

This requires a large upfront investment. The higher the price of Bitcoin and the use of the Bitcoin network, the more value the hardware has. Therefore miners who use their own hardware have an incentive to try and increase the price and use of the network to get higher returns on their investment.

When does this incentive stop? When the miner sells their hardware. A miner can potentially sell their hardware at any time to further recoup their investment. Larger miners will have a hard time liquidating a vast stock of hardware in a short space of time. Time is money in mining, so this locks large miners in to their incentives until they can sell.

Mining Contracts

This also requires an upfront investment, but the outcome is much more flexible. A mining contract could for example be 1 Petahash for 1 year or 365 petahashes for one day, and the cost would be roughly the same. A mining contract may also lock you in to the full length of the contract, or it may allow you to sell the contract on the open market. There is no way of knowing what contract a miner is using. A miner could buy a mining contract for just 1 hour to 51% attack the chain and doublespend an exchange. This is actually a very real problem GPU-based cryptocurrencies are now facing. https://www.crypto51.app .

So, a miner using a mining contract can potentially exit their contract at any point, and even if they can't you have no idea when it will end. The incentives to encourage this type of miner to support Bitcoin only exist while the contract exists.

Bitcoin Cash Holdings

Miners may also hold Bitcoin Cash themselves, and holding Bitcoin Cash is a HUGE incentive to try and help the price increase through increased use of the network. Sometimes miner holdings of Bitcoin Cash may be publicly known (such as Bitmain's >1,000,000 BCH). The reality is though, that for many miners the only time we can know their Bitcoin Cash holdings for sure is during the 100 blocks after they found a block. The block reward is not released to them until this 100 block time limit is reached.

Aren't all of these extremely powerful incentives?

Yes! Absolutely. These incentives for miners are what guide them into alignment with the interests of Bitcoin Cash as a system. But...(yes, there's a but)...

INCENTIVES. ARE. NOT. MAGIC.

Incentives can only guide the miners into alignment with the system. Incentives cannot force the miners to do or think anything. This goes back to what I mentioned at the top of this post that, you can only know SOME of incentives that they have. Miners may have other incentives that pull them out of alignment with the interests of Bitcoin. Taking the example I already gave above, a miner who has rented some hash rate for 2 hours to defraud an exchange by doublespending/51% attacking has stronger incentives to attack the exchange (by attacking the network) than to secure and support the network.

Hypothetical

Let's say a major bank decides one day that Bitcoin is a legitimate threat to it's business model. This major bank will do anything to destroy what it perceives to be a significant threat to it's business. BCH currently costs about $40,000 to 51% attack for 1 hour. That's not chump change...except for a major bank it is. At $40,000 per day they could reorg the chain every block for a whole year for $350m. If we always 'trust ONLY in POW' then this kind of attack would be trivial (although expensive).

Reality

The most ironic thing about this misconception is the fact that BCH would not even exist if we 'trusted ONLY in POW'. BCH exists because many in the community saw the proof-of-work was not solving the crisis in Bitcoin on its own. The fact that BCH exists today, and is in an extremely strong position, is because people thought for themselves, analysed the situation and understood that Bitcoin was under attack. They rallied around the Bitcoin that made the most sense and put their time and energy into it. Miners, developers, investors, business people, merchants, designers, web developers, musicians...all sorts of different people that are needed to build a sustainable ecosystem.

Summary

Incentives are a fundamental part of Bitcoin. They are poorly understood and highly complex. You cannot know what anyone's motives or intentions are. You can only know SOME of the incentives that miners have. If possible, do not simply trust. Use you mind and assess situations. As confusing as it can be, try to understand as best you can. Be wary of those that spoon-feed you an opinion and are critical when you ask questions or ask for explanations.