Proof of work consensus mechanism versus pawn and pledge

TLDR/Summary:

Proof of work (POW) in bitcoin doesn’t necessarily decide whats wrong and whats right.
That would be like accepting that the strongest guy in a village is always right, even though he steals other peoples stuff, defrauds them and beats them up.
In the real world you may not be able to ignore an aggressor, but in the digital realm you can.
A CPU and some electricity can’t force you to keep up the connection and you can disconnect whenever you want.
Proof of work simply generates a costly signal (signal-theory, handicap-principle.
A costly signal, which serves as a pawn or investment up front, which will be lost in case of getting caught cheating.
It essentially means, that a miner has to put his money where his mouth is.
And since you make more profit when playing by the protocol rules, the incentives of cheating are close to zero.
This is true as long as bitcoin is being used by a majority of people who have a demand for honesty and truth.
Bitcoin won’t make much sense in a dishonest and fraudulent environment.
Similar to elections being held in a dictatorship.
It would be contradictory and just a charade, not worth the energy to even pretend.
That’s what proof of work is mainly about: to put your money where your mouth is.
It serves as a pawn and security.
It is not for consensus.
And when you get caught cheating, either intentionally or by accident, the money will be gone and you have to bare the consequences.
If you think I am wrong and “proof of work” is the one and only mechanism for consensus, ask yourself why the terms “honesty” and “honest node” are mentioned 16 times in the bitcoin whitepaper.
The term “decentralization” on the other hand is not mentioned once, even though I admit, that the concept can be read between the lines and is somehow implied in the overall design.
If you want more details keep reading.

The binominal random walk

The race between the honest chain and an attacker, a so called “binominal random walk” is discussed in section 11 of The Bitcoin Whitepaper under “Calculations”.
Satoshi seems to have assumed that the majority of users, miners and therefore hashrate automatically follows the honest chain.
Because if the majority of users would decide for a dishonest chain and therefore for dishonesty and lies in general, then guess what: no system will work!
Assuming that the majority of users will follow the honest chain is the only option.
It is the one premise, which bitcoin is based on: that the majority of human beings value honesty over fraud.
Bitcoin is just a system design, which works and grows inside a honest environment.
It is like a catalyst and serves as an amplifier for honesty.
The same way an airplane wing works in liquid or gaseous environments, but only in one direction.
The direction where the concave side is.
Pull and push at the same time.
It works in the other direction as well, but then you have to turn it around 180 degrees. The same wing design works in different environments like fluids or gaseous but the force of the design pulls and pushes in one direction only.
Same with bitcoin.
This is true as long as a majority of people value honesty over fraud.
And I second Satoshis premise: I personally believe that the majority of human beings value honesty over fraud.

Proof of work analogy - stone masons block competition

The proof of work in bitcoin can be seen as a competition between stonemasons, who each work on carving a block in accordance to certain rules.
For example a polished, rectangular block with an edge length of at least one meter with the signature of the mason.
On each block, a potentially infinite amount of transactions can be written, depending on how large the blocks and how small the transaction engravings are, depending on the stone mason’s skills and the constant improvement of his craftsmanship.
For each engraved transaction, they are getting a few cents extra in addition to the “block reward”, which is a fixed amount for finishing the competition first.
The bigger you make the block, the more transactions you can include.
But if someone finishes before you and has already included some of the transactions you won’t get any rewards and your block gets discarded by the other masons.
Due to those rules most stonemasons normally do not deviate too much and finish the carving of a block somewhere between 5 and 15 minutes, depending on the structure of the stones and other unpredictable variables, which leaves us with a means of production time of 10 minutes.
Beware that over time, the masons get better at their profession and invent better tools and techniques, which enables them to carve out ever bigger blocks in the same amount of time - equivalent to Moore’s Law.
You constantly have to enhance your skills and invest something for the sake of the art of work you have chosen and for survival and life itself (at the end of the day you need something to eat).
The mason who finishes first gets a financial reward, while the other stonemasons get nothing and their blocks are being destroyed.
Therefore the proof of work essentially is a costly signal (signal-theory, handicap-principle, which signals that the stonemason is convinced that his block is a block in accordance with the rules, which will be confirmed by the other masons as soon as he finished.
The signal ist costly, because the stonemasons have to make a financially investment up front with regard to time, energy, and work (better tools are included in “work”, since the mason has to invest work to create or exchange those tools - therefore tools are a subset of work).
On bitcoin its compute, energy and work.
They do not know if they will win.
The reward for winning the competition covers their initial costs for their tools, time and overall work, including a surplus as a salary for their service and for the risk of not winning the competition several times in a row.
The surplus has to be high enough so that they can financially survive losing the competition several times in a row and therefore losing out on the block reward, since it is statistically highly unlikely that a mason will never lose.
Similar to a professional runner or poker player who doesn’t finish at a payed position every time and therefore has to calculate it in.
If a mason loses the competition he also loses out on the block reward and the chance to cover his initial investment, including the financial surplus for his service.
If you are really bad at your craftsmanship you never win a competition, never break even on your investment and therefore should search for another craftsmanship that suits you.
The verification process from the other masons is 99.99% accurate and happens very fast, since they only have to check visually and don’t have to physically engrave the signatures.
Therefore the intention of creating a fraudulent block is highly unlikely.
When the masons verify each others work, they all have a say in the process.
Just one mason in this competition, no matter how bad and unskilled, even if it is his first time and he is the worst mason the competition has ever seen, has the right to point out an error of the winners block transactions (the transactions are part of the block, therefore transactions are a subset of the block) and demand a doublecheck from the other miners. Then the other masons and the audience can check if the transaction is valid or not (in bitcoin this can be done mathematically and computationally).
Therefore the masons have a financially incentive to win the competition in a honest way.
Especially since a masons reputation, good name and signature will be damaged in case of cheating or fraud.
His identity will have to bare the consequences.
Which is the reason why the word “honest” is mentioned 16 times in the bitcoin whitepaper while the word “decentralization” is not mentioned once, even though it can be read between the lines and is implied and required for the bitcoin protocol to work.
Proof of work is about honesty, not about hashrate or brute force.
It means being willing to take part in an endless search for a point which can never be reached - an asymptotic race like a flea being able to only jump half the distance it jumped before, therefore never being able to cross the finish line.
It serves as a costly signal, a pawn, security or investment up front.
It means you are putting your money where your mouth is.
You have something at risk and are personally invested.
It is not a consensus mechanism.
There is no consensus mechanism in bitcoin.
Only a barter - to be helpful when being used truthfully and honest as described in The Bitcoin Whitepaper.

Hashrate for a stable blocktime

Hashrate essentially is brute force and using it as consensus mechanism would be equivalent to the strongest guy in a village telling the rest of the people whats right and whats wrong.
No matter if he is stealing, robbing or murdering other people and taking their health, lifes or lifes work.
If you think that the strongest guy or the most powerful institution has the right to arbitrarily decide whats right and whats wrong, you may find “Ragnar Redbeards - might is right” interesting, from which Anton LaVey drew for the satanic bible.
And without a coordinated collective deciding and acting against it, it ironically is somehow true that “might is right”.
Normal cells coordinate to create powerful humans, normal humans can coordinate and form a powerful collective to overpower a single powerful human and a powerful coordinated collective can be overpowered by a better coordinated and more powerful collective.
However, hashrate costs money, is an investment up front and therefore serves as a security or pawn which will be lost in case of cheating as long as the majority is interested in honesty.
Therefore it incentivizes honest competition since most humans and especially criminals are rational actors and do not want to lose out on profits.
Everybody wants to get more money out of his work than he initially invested.
And vice versa nobody wants to lose the money he initially invested.
The work of a timestamp server is doing timestamps though.
And the bits/target, the nonce, the difficulty, the difficulty-adjustment algorithm and in the end the hashrate is mainly due to mathematically ensure a stable production of blocks (blocktime), of around 10 minutes.
It is only a part of the overall work which consists of collecting, propagating, processing and verifying transactions.
And the bigger the blocks, the smaller the hashrate’s role regarding the security and overall work.
And since Satoshi foresaw miners ending up in big data centers, a cheating miner can face legal consequences since it is quite hard to hide a data center at a certain size.

The proof of work, services, goods and commodities

One simple question first: what could be the proof of work if your business and specialization in the market is being a timestamp server or a payment processor?
If you are an email provider, what do you think your work is?
Would you do a limitation of 6 emails per second worldwide?
If you are an internet service provider, what do you think your work is?
Would you do a limitation of 1 byte per second on bandwidth? If you are a messaging app what do you think your work is?
Would you do a limitation of 6 messages per second worldwide on your service?
If you are a bakery, what do you think your work is? Would you do a limitation of 6 breads a day on your service? Or would you raise your supply according to the demand as long as it is technical possible and economical viable?
Because if you don’t create a better longterm supply, someone else will.
Because the more customers you serve and satisfy, the more signatures and identities will be thankful to you and may give you something back for your service and their satisfaction.

And if you are a timestamp service provider or payment processor, what do you think your work is?
Burning more and more energy and money for an increase in hashrate while the amount of transactions stagnates, because it was arbitrarily restricted?
Or is your work the processing of transactions and timestamps?
Would you do an infinite limitation of 6 transactions per second?
Do you think that you are able to compete against other payment processors and networks longterm if you restrict yourself to 6 transactions per second?
From an economical perspective small-block-1MB-BTC may have one of the worst cost/benefit ratios in the history of humanity.

You can restrict your own work and scalability, but then your product can only ever be used by a few.
And since the internet and especially payment networks and currencies are all about network effects, your payment network probably won’t get adopted.
Payment networks, currencies and moneys are being adopted, because they can be used and their network effects can be utilized.
Other people are already on board, accept it and know that their friends can adopt it as well, because it scales.
If everybody knows that it won’t scale and the network effect is 6 additionally peers per second, adoption can only happen very slow.
Nobody would adopt paypal, facebook, instagram or tiktok if they would restrict the number of interactions on the network to six interactions per second on the whole network.
It would be considered a joke, since you couldn’t onboard your friends or interact freely.

And to make one thing very clear: so called layer2 or layer3 solutions are not bitcoin.
Those are separate networks and protocols.
Similar to gold backed promises on paper not being gold but a security instead.

Quintuple win-win-win-win-win vs. double win-win

If you go to the gym for lifting weights you do work and something for your health.
And if you continue doing that, your muscles grow which could serve as a “proof of work” signal.

But what if instead of lifting weights you would cut and carry stones and build a wall at the fresh air?
Or cut trees, cut them into planks and build a house at the fresh air?
You would have the muscle growth, the health benefits of exercise and creative work, the appreciative look of women, fresh air and the sunlight.
And you would have either built a wall, a house or something else of utility.
Which is a win-win-win-win-win situation instead of a win or win-win situation at the gym.
Muscles are kinda useless if you just have them for the sake of having them.
In signal theory they can also be seen as a costly signal - but mu signal theory and muscles would be a topic of its own.
On BTC it is similar: you are using a lot of energy on a repetitive search for hashes, but in reality you are just processing six transactions per second with that energy.
To come back to our gym analogy: in the gym you are also using a lot of energy for repetitive lifting weights, but in reality you are just flexing your muscles instead of using them to build something useful and of demand.
This is just an abstraction and oversimplified analogy, but I hope you get the point that I want to make.
You can do tasks in such ways, that you are solving more than just one problem.

Quote:

“If you succeed tonight, more than one innocent life may be spared.”
Albus Dumbledore in “The prisoner of Azkaban”, where Harry and Hermine are going back in time to rescue the Hippogriff and Sirius Black together.

Therefore ending up with not just a win or a win-win, but maybe with a win-win-win or even a win-win-win-win situation.
The more wins you can bundle into one task, the more efficient you are.
And I am not talking about multitasking here, I am talking about one task which is being done in such a way, that it has several benefits.
This is called efficient, economical or a good cost/benefit-ratio.
Using as much energy as some small countries to process five transactions per second is not very economic or efficient.
It is a very bad cost/benefit ratio.
Now some people will argue that it is for the security reasons and that the security of a decentralized monetary system can’t be measured or that the established worldwide payment processors maybe need much more energy in total.
More about that in a separate article about the so called blockchain trilemma.
Spoiler alert: in the case of 1MB-BTC the trilemma is artificially created and it isn’t a trilemma but a dilemma instead.

The binary point of view - a block of bytes and bits:

In short, the proof of work in bitcoin can be categorized into several parts, namely:

• the collection, propagation and ordering of transactions.
• the verification of transactions and scripts.
• hashpower (the search for a hash which satisfies the bits/target).

So in essence, for all three categories there is hardware and energy needed, which costs money.
Now you can keep it one sided and focus mainly on hashpower and use your hardware and energy only on hashing.
Or you delegate some of that hardware and energy to payment processing and keep a balance.
One attempt has a good cost/benefit ratio, the other doesn’t.

To dive in a little bit deeper, the proof of work in bitcoin is about finding a valid blockhash.
The blockhash is on the top and is mathematically interlinked with every byte and bit below.
It consists of several parts, which are therefore all subsets of the blockheader and the proof of work.

This means, that the hashrate as well as the merkle tree with all its transactions are both a subset of the blockhash and therefore part of the “proof of work”.
Therefore the proof of work is NOT just the hashrate which generates the blockheader.
The “proof of work” includes the processing of payments.
The hashrate is just a part of it, and should be in some kind of balance against the amount of transactions and the computation which is being needed to process them.
It doesn’t have to but you may end up with an imbalanced system.

The amount of interlinked transactions including the fees which are being paid to the miners are all part of the “proof of work” and enhance security.
Because the more complex the utxo set is, the harder it is to fake it and redo the proof of work in hindsight.

It means, that for generating the “proof of work”, the miner has to advance money on loan and therefore has to make an investment up front.
It serves as a pawn or security.
This investment is mainly used as collateral, since it will be gone in case of cheating.
Additionally the mining equipment and other things could get confiscated, depending on the cruelty of the fraud.
Assuming that miners are to big to be anonymous as Satoshi has predicted.
Therefore “proof of work” is a mechanism to incentivize honest behavior, since a dishonest miner or a cheater would lose the block reward which is needed to compensate the initial investment over time.
And since most criminals are rational actors, no rational criminal would attack the bitcoin network since the result would be a net loss.

The hashrate is clock cycles, computation and time

The hashrate (nonce and bits) is mainly for maintaining a stable blocktime in a decentralized manner.
The hashrate is not used for consensus or for security, since a chain of normal hashes (without leading zeros) is as secure as a chain of hashes with a certain amount of leading zeros.
You can’t change one bit in retrospect without changing the blockheaders.
The only difference is the amount of work which was summoned to create the block headers.
The more leading zeros, the costlier the signal and therefore the higher the potential loss in case of cheating.
There is only one rule: honesty regarding the history of transactions and signatures.
Besides maintaining a stable blocksize, the hashrate increases the investment and pawn of every miner.
This investment and security is gone in case of cheating and therefore incentivizes honest behaviour.
Dishonest actors will lose their initial block reward and therefore won’t be compensated by the network/protocol for their initial investment.
So as long as your business model is to make money you are incentivized to be an honest miner like stated over 16 times in the whitepaper.
Simply because the protocol rewards “honesty” over dishonesty at least as long as an “economic majority” demands “honesty” over “fraud”.
And whenever there is a demand for something, the invisible hand of universal market forces will match it against a corresponding supply.
And in the case of bitcoin those forces can manifest peer-to-peer instead of in a centralized manner.
Because with centralization you always introduce “potential points of corruption” like in our current system.
Instead of having to corrupt 80 million german citizens you only have to go and corrupt less than 630 politicians in the german Bundestag.

Rewarding honesty - the fixing of conditioning based on positive stimuli

In our current system lazy, dishonest and fraudulent behavior is rewarded - bitcoin may change that and could be seen as a system which reintroduces getting rewarded for honest behaviour.
Whenever there is a dishonest miner, the other miners and users will find out and can coordinate.
The users can send their transactions and the corresponding fees to an honest miner (through mapi), who therefore will have more “money” or user support than the dishonest miner.
The dishonest miner will lose money, won’t be able to compensate his initial investment, will be out of business and may face legal consequences shortly after.
If an analysis shows that it was on purpose and there are too many coincidences, you may have to defend yourself against claims of fraud.
Especially when everything is running on bitcoin.
Or do you think an energy company or any other human or business wants to interact with a miner who obviously is trying to cheat the rest of a worldwide network?
They will stop delivering energy, hardware or any other service or product.
For the first time in the history I know about, people can directly vote for honesty with their self created digital identity (asynchronous key pair), money, signature and corresponding identity.
And they can penalize dishonest behavior, cheaters and fraudsters.
Imagine a world, where you can withdraw your workforce and monetary support for a person, party, institution, government, undertaking, enterprise or in this case a timestamp sever in case of fraudulent behaviour.
Because the identities are not created and issued by the authority they judge.
Because every authority and the positions of power they hold has an interest of getting more power.
They are attracted by ever more power and are therefore incentivized to censor and ban the identities opposing them.
Welcome to the reintroduction of accountability and consequences, the fundamentals of law and order.
This is what bitcoin was and still is about.
And it is the main reason why BigBlockBitcoin is antagonized so much.
Because of the reintroduction of accountability and consequences.
The reintroduction of law and order.
The powers that be do not seem to be amused.

Thanks for reading!