Inside Bitcoin Consensus
Based on a recent paper that included collaboration from renowned experts such as [Lynn Alden](Lyn Alden), Steve Lee, and Ren Crypto Fish, we discuss in depth how Bitcoin's consensus is built, the main risks, and the complex dynamics of protocol upgrades.
Podcast
Presentation
1. Introduction to Consensus in Bitcoin
Consensus in Bitcoin is the foundation that keeps the network secure and functional, allowing users worldwide to perform transactions in a decentralized manner without the need for intermediaries. Since its launch in 2009, Bitcoin is often described as an "immutable" system designed to resist changes, and it is precisely this resistance that ensures its security and stability.
The central idea behind consensus in Bitcoin is to create a set of acceptance rules for blocks and transactions, ensuring that all network participants agree on the transaction history. This prevents "double-spending," where the same bitcoin could be used in two simultaneous transactions, something that would compromise trust in the network.
Evolution of Consensus in Bitcoin
Over the years, consensus in Bitcoin has undergone several adaptations, and the way participants agree on changes remains a delicate process. Unlike traditional systems, where changes can be imposed from the top down, Bitcoin operates in a decentralized model where any significant change needs the support of various groups of stakeholders, including miners, developers, users, and large node operators.
Moreover, the update process is extremely cautious, as hasty changes can compromise the network's security. As a result, the philosophy of "don't fix what isn't broken" prevails, with improvements happening incrementally and only after broad consensus among those involved. This model can make progress seem slow but ensures that Bitcoin remains faithful to the principles of security and decentralization.
2. Technical Components of Consensus
Bitcoin's consensus is supported by a set of technical rules that determine what is considered a valid transaction and a valid block on the network. These technical aspects ensure that all nodes—the computers that participate in the Bitcoin network—agree on the current state of the blockchain. Below are the main technical components that form the basis of the consensus.
Validation of Blocks and Transactions
The validation of blocks and transactions is the central point of consensus in Bitcoin. A block is only considered valid if it meets certain criteria, such as maximum size, transaction structure, and the solving of the "Proof of Work" problem. The proof of work, required for a block to be included in the blockchain, is a computational process that ensures the block contains significant computational effort—protecting the network against manipulation attempts.
Transactions, in turn, need to follow specific input and output rules. Each transaction includes cryptographic signatures that prove the ownership of the bitcoins sent, as well as validation scripts that verify if the transaction conditions are met. This validation system is essential for network nodes to autonomously confirm that each transaction follows the rules.
Chain Selection
Another fundamental technical issue for Bitcoin's consensus is chain selection, which becomes especially important in cases where multiple versions of the blockchain coexist, such as after a network split (fork). To decide which chain is the "true" one and should be followed, the network adopts the criterion of the highest accumulated proof of work. In other words, the chain with the highest number of valid blocks, built with the greatest computational effort, is chosen by the network as the official one.
This criterion avoids permanent splits because it encourages all nodes to follow the same main chain, reinforcing consensus.
Soft Forks vs. Hard Forks
In the consensus process, protocol changes can happen in two ways: through soft forks or hard forks. These variations affect not only the protocol update but also the implications for network users:
Soft Forks: These are changes that are backward compatible. Only nodes that adopt the new update will follow the new rules, but old nodes will still recognize the blocks produced with these rules as valid. This compatibility makes soft forks a safer option for updates, as it minimizes the risk of network division.
Hard Forks: These are updates that are not backward compatible, requiring all nodes to update to the new version or risk being separated from the main chain. Hard forks can result in the creation of a new coin, as occurred with the split between Bitcoin and Bitcoin Cash in 2017. While hard forks allow for deeper changes, they also bring significant risks of network fragmentation.
These technical components form the base of Bitcoin's security and resilience, allowing the system to remain functional and immutable without losing the necessary flexibility to evolve over time.
3. Stakeholders in Bitcoin's Consensus
Consensus in Bitcoin is not decided centrally. On the contrary, it depends on the interaction between different groups of stakeholders, each with their motivations, interests, and levels of influence. These groups play fundamental roles in how changes are implemented or rejected on the network. Below, we explore the six main stakeholders in Bitcoin's consensus.
1. Economic Nodes
Economic nodes, usually operated by exchanges, custody providers, and large companies that accept Bitcoin, exert significant influence over consensus. Because they handle large volumes of transactions and act as a connection point between the Bitcoin ecosystem and the traditional financial system, these nodes have the power to validate or reject blocks and to define which version of the software to follow in case of a fork.
Their influence is proportional to the volume of transactions they handle, and they can directly affect which chain will be seen as the main one. Their incentive is to maintain the network's stability and security to preserve its functionality and meet regulatory requirements.
2. Investors
Investors, including large institutional funds and individual Bitcoin holders, influence consensus indirectly through their impact on the asset's price. Their buying and selling actions can affect Bitcoin's value, which in turn influences the motivation of miners and other stakeholders to continue investing in the network's security and development.
Some institutional investors have agreements with custodians that may limit their ability to act in network split situations. Thus, the impact of each investor on consensus can vary based on their ownership structure and how quickly they can react to a network change.
3. Media Influencers
Media influencers, including journalists, analysts, and popular personalities on social media, have a powerful role in shaping public opinion about Bitcoin and possible updates. These influencers can help educate the public, promote debates, and bring transparency to the consensus process.
On the other hand, the impact of influencers can be double-edged: while they can clarify complex topics, they can also distort perceptions by amplifying or minimizing change proposals. This makes them a force both of support and resistance to consensus.
4. Miners
Miners are responsible for validating transactions and including blocks in the blockchain. Through computational power (hashrate), they also exert significant influence over consensus decisions. In update processes, miners often signal their support for a proposal, indicating that the new version is safe to use. However, this signaling is not always definitive, and miners can change their position if they deem it necessary.
Their incentive is to maximize returns from block rewards and transaction fees, as well as to maintain the value of investments in their specialized equipment, which are only profitable if the network remains stable.
5. Protocol Developers
Protocol developers, often called "Core Developers," are responsible for writing and maintaining Bitcoin's code. Although they do not have direct power over consensus, they possess an informal veto power since they decide which changes are included in the main client (Bitcoin Core). This group also serves as an important source of technical knowledge, helping guide decisions and inform other stakeholders.
Their incentive lies in the continuous improvement of the network, ensuring security and decentralization. Many developers are funded by grants and sponsorships, but their motivations generally include a strong ideological commitment to Bitcoin's principles.
6. Users and Application Developers
This group includes people who use Bitcoin in their daily transactions and developers who build solutions based on the network, such as wallets, exchanges, and payment platforms. Although their power in consensus is less than that of miners or economic nodes, they play an important role because they are responsible for popularizing Bitcoin's use and expanding the ecosystem.
If application developers decide not to adopt an update, this can affect compatibility and widespread acceptance. Thus, they indirectly influence consensus by deciding which version of the protocol to follow in their applications.
These stakeholders are vital to the consensus process, and each group exerts influence according to their involvement, incentives, and ability to act in situations of change. Understanding the role of each makes it clearer how consensus is formed and why it is so difficult to make significant changes to Bitcoin.
4. Mechanisms for Activating Updates in Bitcoin
For Bitcoin to evolve without compromising security and consensus, different mechanisms for activating updates have been developed over the years. These mechanisms help coordinate changes among network nodes to minimize the risk of fragmentation and ensure that updates are implemented in an orderly manner. Here, we explore some of the main methods used in Bitcoin, their advantages and disadvantages, as well as historical examples of significant updates.
Flag Day
The Flag Day mechanism is one of the simplest forms of activating changes. In it, a specific date or block is determined as the activation moment, and all nodes must be updated by that point. This method does not involve prior signaling; participants simply need to update to the new software version by the established day or block.
Advantages: Simplicity and predictability are the main benefits of Flag Day, as everyone knows the exact activation date.
Disadvantages: Inflexibility can be a problem because there is no way to adjust the schedule if a significant part of the network has not updated. This can result in network splits if a significant number of nodes are not ready for the update.
An example of Flag Day was the Pay to Script Hash (P2SH) update in 2012, which required all nodes to adopt the change to avoid compatibility issues.
BIP34 and BIP9
BIP34 introduced a more dynamic process, in which miners increase the version number in block headers to signal the update. When a predetermined percentage of the last blocks is mined with this new version, the update is automatically activated. This model later evolved with BIP9, which allowed multiple updates to be signaled simultaneously through "version bits," each corresponding to a specific change.
Advantages: Allows the network to activate updates gradually, giving more time for participants to adapt.
Disadvantages: These methods rely heavily on miner support, which means that if a sufficient number of miners do not signal the update, it can be delayed or not implemented.
BIP9 was used in the activation of SegWit (BIP141) but faced challenges because some miners did not signal their intent to activate, leading to the development of new mechanisms.
User Activated Soft Forks (UASF) and User Resisted Soft Forks (URSF)
To increase the decision-making power of ordinary users, the concept of User Activated Soft Fork (UASF) was introduced, allowing node operators, not just miners, to determine consensus for a change. In this model, nodes set a date to start rejecting blocks that are not in compliance with the new update, forcing miners to adapt or risk having their blocks rejected by the network.
URSF, in turn, is a model where nodes reject blocks that attempt to adopt a specific update, functioning as resistance against proposed changes.
Advantages: UASF returns decision-making power to node operators, ensuring that changes do not depend solely on miners.
Disadvantages: Both UASF and URSF can generate network splits, especially in cases of strong opposition among different stakeholders.
An example of UASF was the activation of SegWit in 2017, where users supported activation independently of miner signaling, which ended up forcing its adoption.
BIP8 (LOT=True)
BIP8 is an evolution of BIP9, designed to prevent miners from indefinitely blocking a change desired by the majority of users and developers. BIP8 allows setting a parameter called "lockinontimeout" (LOT) as true, which means that if the update has not been fully signaled by a certain point, it is automatically activated.
Advantages: Ensures that changes with broad support among users are not blocked by miners who wish to maintain the status quo.
Disadvantages: Can lead to network splits if miners or other important stakeholders do not support the update.
Although BIP8 with LOT=True has not yet been used in Bitcoin, it is a proposal that can be applied in future updates if necessary.
These activation mechanisms have been essential for Bitcoin's development, allowing updates that keep the network secure and functional. Each method brings its own advantages and challenges, but all share the goal of preserving consensus and network cohesion.
5. Risks and Considerations in Consensus Updates
Consensus updates in Bitcoin are complex processes that involve not only technical aspects but also political, economic, and social considerations. Due to the network's decentralized nature, each change brings with it a set of risks that need to be carefully assessed. Below, we explore some of the main challenges and future scenarios, as well as the possible impacts on stakeholders.
Network Fragility with Alternative Implementations
One of the main risks associated with consensus updates is the possibility of network fragmentation when there are alternative software implementations. If an update is implemented by a significant group of nodes but rejected by others, a network split (fork) can occur. This creates two competing chains, each with a different version of the transaction history, leading to unpredictable consequences for users and investors.
Such fragmentation weakens Bitcoin because, by dividing hashing power (computing) and coin value, it reduces network security and investor confidence. A notable example of this risk was the fork that gave rise to Bitcoin Cash in 2017 when disagreements over block size resulted in a new chain and a new asset.
Chain Splits and Impact on Stakeholders
Chain splits are a significant risk in update processes, especially in hard forks. During a hard fork, the network is split into two separate chains, each with its own set of rules. This results in the creation of a new coin and leaves users with duplicated assets on both chains. While this may seem advantageous, in the long run, these splits weaken the network and create uncertainties for investors.
Each group of stakeholders reacts differently to a chain split:
Institutional Investors and ETFs: Face regulatory and compliance challenges because many of these assets are managed under strict regulations. The creation of a new coin requires decisions to be made quickly to avoid potential losses, which may be hampered by regulatory constraints.
Miners: May be incentivized to shift their computing power to the chain that offers higher profitability, which can weaken one of the networks.
Economic Nodes: Such as major exchanges and custody providers, have to quickly choose which chain to support, influencing the perceived value of each network.
Such divisions can generate uncertainties and loss of value, especially for institutional investors and those who use Bitcoin as a store of value.
Regulatory Impacts and Institutional Investors
With the growing presence of institutional investors in Bitcoin, consensus changes face new compliance challenges. Bitcoin ETFs, for example, are required to follow strict rules about which assets they can include and how chain split events should be handled. The creation of a new asset or migration to a new chain can complicate these processes, creating pressure for large financial players to quickly choose a chain, affecting the stability of consensus.
Moreover, decisions regarding forks can influence the Bitcoin futures and derivatives market, affecting perception and adoption by new investors. Therefore, the need to avoid splits and maintain cohesion is crucial to attract and preserve the confidence of these investors.
Security Considerations in Soft Forks and Hard Forks
While soft forks are generally preferred in Bitcoin for their backward compatibility, they are not without risks. Soft forks can create different classes of nodes on the network (updated and non-updated), which increases operational complexity and can ultimately weaken consensus cohesion. In a network scenario with fragmentation of node classes, Bitcoin's security can be affected, as some nodes may lose part of the visibility over updated transactions or rules.
In hard forks, the security risk is even more evident because all nodes need to adopt the new update to avoid network division. Experience shows that abrupt changes can create temporary vulnerabilities, in which malicious agents try to exploit the transition to attack the network.
Bounty Claim Risks and Attack Scenarios
Another risk in consensus updates are so-called "bounty claims"—accumulated rewards that can be obtained if an attacker manages to split or deceive a part of the network. In a conflict scenario, a group of miners or nodes could be incentivized to support a new update or create an alternative version of the software to benefit from these rewards.
These risks require stakeholders to carefully assess each update and the potential vulnerabilities it may introduce. The possibility of "bounty claims" adds a layer of complexity to consensus because each interest group may see a financial opportunity in a change that, in the long term, may harm network stability.
The risks discussed above show the complexity of consensus in Bitcoin and the importance of approaching it gradually and deliberately. Updates need to consider not only technical aspects but also economic and social implications, in order to preserve Bitcoin's integrity and maintain trust among stakeholders.
6. Recommendations for the Consensus Process in Bitcoin
To ensure that protocol changes in Bitcoin are implemented safely and with broad support, it is essential that all stakeholders adopt a careful and coordinated approach. Here are strategic recommendations for evaluating, supporting, or rejecting consensus updates, considering the risks and challenges discussed earlier, along with best practices for successful implementation.
1. Careful Evaluation of Proposal Maturity
Stakeholders should rigorously assess the maturity level of a proposal before supporting its implementation. Updates that are still experimental or lack a robust technical foundation can expose the network to unnecessary risks. Ideally, change proposals should go through an extensive testing phase, have security audits, and receive review and feedback from various developers and experts.
2. Extensive Testing in Secure and Compatible Networks
Before an update is activated on the mainnet, it is essential to test it on networks like testnet and signet, and whenever possible, on other compatible networks that offer a safe and controlled environment to identify potential issues. Testing on networks like Litecoin was fundamental for the safe launch of innovations like SegWit and the Lightning Network, allowing functionalities to be validated on a lower-impact network before being implemented on Bitcoin.
The Liquid Network, developed by Blockstream, also plays an important role as an experimental network for new proposals, such as OP_CAT. By adopting these testing environments, stakeholders can mitigate risks and ensure that the update is reliable and secure before being adopted by the main network.
3. Importance of Stakeholder Engagement
The success of a consensus update strongly depends on the active participation of all stakeholders. This includes economic nodes, miners, protocol developers, investors, and end users. Lack of participation can lead to inadequate decisions or even future network splits, which would compromise Bitcoin's security and stability.
4. Key Questions for Evaluating Consensus Proposals
To assist in decision-making, each group of stakeholders should consider some key questions before supporting a consensus change:
- Does the proposal offer tangible benefits for Bitcoin's security, scalability, or usability?
- Does it maintain backward compatibility or introduce the risk of network split?
- Are the implementation requirements clear and feasible for each group involved?
- Are there clear and aligned incentives for all stakeholder groups to accept the change?
5. Coordination and Timing in Implementations
Timing is crucial. Updates with short activation windows can force a split because not all nodes and miners can update simultaneously. Changes should be planned with ample deadlines to allow all stakeholders to adjust their systems, avoiding surprises that could lead to fragmentation.
Mechanisms like soft forks are generally preferable to hard forks because they allow a smoother transition. Opting for backward-compatible updates when possible facilitates the process and ensures that nodes and miners can adapt without pressure.
6. Continuous Monitoring and Re-evaluation
After an update, it's essential to monitor the network to identify problems or side effects. This continuous process helps ensure cohesion and trust among all participants, keeping Bitcoin as a secure and robust network.
These recommendations, including the use of secure networks for extensive testing, promote a collaborative and secure environment for Bitcoin's consensus process. By adopting a deliberate and strategic approach, stakeholders can preserve Bitcoin's value as a decentralized and censorship-resistant network.
7. Conclusion
Consensus in Bitcoin is more than a set of rules; it's the foundation that sustains the network as a decentralized, secure, and reliable system. Unlike centralized systems, where decisions can be made quickly, Bitcoin requires a much more deliberate and cooperative approach, where the interests of miners, economic nodes, developers, investors, and users must be considered and harmonized. This governance model may seem slow, but it is fundamental to preserving the resilience and trust that make Bitcoin a global store of value and censorship-resistant.
Consensus updates in Bitcoin must balance the need for innovation with the preservation of the network's core principles. The development process of a proposal needs to be detailed and rigorous, going through several testing stages, such as in testnet, signet, and compatible networks like Litecoin and Liquid Network. These networks offer safe environments for proposals to be analyzed and improved before being launched on the main network.
Each proposed change must be carefully evaluated regarding its maturity, impact, backward compatibility, and support among stakeholders. The recommended key questions and appropriate timing are critical to ensure that an update is adopted without compromising network cohesion. It's also essential that the implementation process is continuously monitored and re-evaluated, allowing adjustments as necessary and minimizing the risk of instability.
By following these guidelines, Bitcoin's stakeholders can ensure that the network continues to evolve safely and robustly, maintaining user trust and further solidifying its role as one of the most resilient and innovative digital assets in the world. Ultimately, consensus in Bitcoin is not just a technical issue but a reflection of its community and the values it represents: security, decentralization, and resilience.
8. Links
Whitepaper:
Youtube (pt-br): https://www.youtube.com/watch?v=rARycAibl9o&list=PL-qnhF0qlSPkfhorqsREuIu4UTbF0h4zb
