architecture

The only recipe to get a healthy peer-to-peer network is to have an active community around it: a lot of users and transactions. To overcome this, one of the best ways is to give incentives to users to take an active part in the system. In the blockchain world, the solution is to offer electronic coins to miners when they successfully mine a block, and let them set a price on transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. This also provides a way to initially distribute coins into circulation, since there is no central authority to issue them. We can do an analogy with gold miners expanding the total amount of gold in the market. To have a steady addition of new tokens, most of blockchain technologies set a limited time to mine a block. For instance, in the bitcoin architecture, it happens every 10 minutes’, which means that a miner has only 10 minutes to run his script to find the right nonce value. If he succeeds and his block gets to be approved by the majority, he receives an award of 12.5 bitcoins (in November 2016)(Drainvile, 2012). This reward decreases with time: it started from 50 bitcoins per bloc, and goes down every four years. He also realises the transactions listed in his repertory and get paid for those transactions. The other miners will try to mine the next block, as will do the successful miner. The only expanse in this process is CPU time calculated in hash/sec and electricity (Drainvile, 2012). So miner will strive to have the most important CPU power to mine quicker than the others. As technology becomes better and better, the code of the blockchain is updated as well: to keep the 10 minutes’ cap in order, the hash function get more complex over the time. So in the end, Bitcoin makes sure that new coins will be minted at a fixed rate, that is, the larger the Bitcoin community and the total computational resource devoted to coin a generation, the more difficult the computational puzzle becomes.

Since there are many nodes working in the network as miners, it is possible that two blocks are created almost simultaneously, thus creating a fork in the chain. The architecture is created so the majority of nodes focus on the longest chain, which will be by design the most complex one. Blocks that were not logged to the longest chain are dropped, and the transactions inside them are put back in the miners’ memory pool (Drainvile, 2012).

To reach a stable system, not submitted to inflation or deflation issues, the original idea of bitcoin was to set a fixed number of coins to be minted: 21 million bitcoins will at the end be in circulation (Buchholz, Delaney, Warren & Parker, 2012). Once this number is reached, the incentive can transition entirely too transaction fees and be completely inflation free. But as the system is based on the low cost of transaction, the main incentive for miners comes from the coin rewards. This is one of the main issues of the bitcoin’s future life.

All this process creates an incentive for miners to stay honest. But if an attacker is able to come up with enough CPU power than all the honest nodes, we will face two decisions: use his power to mint new blocks and get coins, or create a malicious chain approved by the majority. So the architecture is here central for nodes to play by the rules: the incentive has to more profitable than stealing. For the moment, it has been very difficult to for miners to pass by the system, but we can observe big consortium of miners who could be in theory capable of such practice.