What is the Nakamoto Consensus Bitcoin

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One of Bitcoin’s most unique features is its consensus algorithm, which set a precedent for a Byzantine fault-tolerant peer-to-peer currency system (BFT). The most common definition of Bitcoin’s consensus algorithm, specifically the definition that most online sources point to, is Proof of Work (PoW), the consensus mechanism that relies on participants solving puzzles. cryptographic data to validate new information. While PoW is an important part of Bitcoin’s global consensus model, it does not encompass the entirety of how new blocks are added to the blockchain. Instead, PoW is part of a larger consensus algorithm that is commonly known as the “Nakamoto Consensus,” named after the pseudonymous creator of Bitcoin himself. Nakamoto’s consensus is what made Bitcoin different from the countless digital currency implementations that came before it, such as DigiCash or b-money. Bitcoin’s unique consensus model allowed it to be the first BFT (Byzantine Fault Tolerance) system that could evolve organically and, thus, set a precedent for subsequent cryptocurrencies that continue to use a variant of the Nakamoto consensus to feed their protocols.

An important part of the Nakamoto consensus, at least in Bitcoin, is PoW. PoW refers to the cryptographic mechanism that relies on the ability of participants to solve difficult computational problems in order to have greater participation in the network. In the case of Bitcoin, PoW is essentially a distributed way for chain participants to determine the most valid block. Each participant (or minor) P tries to find a valid solution for the block of transactions to come. This involves finding an h value such that when h is hashed with the SHA-256 hash algorithm, the required value is found. This is often an iterative process; nonces (numbers used once) are added to the end of the hashed string on each successive turn until the required value is given. Once P manages to find a solution at the PoW, they broadcast their block to the rest of the network, where it is then approved if none of the transactions inside have already been spent according to the time stamp. P then receives a bitcoin reward as compensation for the amount of computing power spent in order to validate the next block of transactions.

Mining in Bitcoin is really committing a certain amount of computing resources for the sole purpose of solving difficult computing problems and validating new blocks. The higher the computing power of an individual node, the more likely it is to find a correct value for the SHA-256 hash and thereby resolve the cryptographic hash associated with the PoW of that particular block. PoW allows Bitcoin to be both fully decentralized and fully secure. Anyone can participate in the mining process, without needing to first have a certain number of bitcoins to do so. In fact, it’s completely unclear who will be the winner of the next mining award at any given time, with the extra computing power only serving to increase the likelihood of an individual node succeeding. Additionally, the mining process also prompts nodes to act honestly due to the rewards associated with serving the right block. This means that in order to take over the network, a malicious attacker must control over 51% of the compute / hash power on the network and prevent validation of legitimate blocks. This is commonly referred to as a “51% attack”. Due to the current size of the Bitcoin network, the economic cost of accumulating over 51% of the hash power currently present in the network is significant and therefore extremely difficult.

The second part of Nakamoto’s consensus is what made Bitcoin the first scalable BFT currency platform. The Nakamoto consensus emphasizes the longest chain, claiming that the longest chain that is also valid based on timestamps (none of the blocks are invalid due to double-spend transactions, for example) is the most legitimate, because it had the greatest amount of computing resources dedicated to it. This introduces trust into an otherwise trustless system, thus allowing the Bitcoin network to operate without centralized authority. For example, if a participant has been inactive or has recently joined, they may simply accept the current longest string as evidence of what has happened previously within the network. They don’t need to rely on a third party or some sort of establishment; instead, they just start to rely on the longest valid chain, thereby gaining the ability to receive rewards by offering a computationally valid block. In fact, the “longest chain rule,” as it has been dubbed by the cryptocurrency community, has allowed Bitcoin to succeed where old PoW digital currencies failed. This gave participants confidence in the network and also set a standard through which minors could start joining and leaving at will without having to rely on an authority. The longest chain rule has been adopted by many digital asset systems and blockchains that have followed Bitcoin.

Nakamoto Consensus ultimately revolutionized both digital currency and modern cryptography by introducing a scalable BFT solution, allowing Bitcoin to succeed as a trustless peer-to-peer transaction system. Specifically, Nakamoto Consensus succeeded in creating a standard for measuring the validity of the blockchain: the amount of compute resources spent on it. While Nakamoto’s consensus model has seen its fair share of criticism, largely due to its tendency to allow the chain to branch off, it remains one of the most effective and successful consensus mechanisms among decentralized networks. By tying a scarce resource (computing power) to the blockchain, the Nakamoto Consensus gives Bitcoin implicit value, security, and trust compared to other monetary systems.

This is a guest article by Archie Chaudhury. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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