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Bitcoin's Underlying Incentives


Bitcoin's Underlying Incentives, illustration

Credit: Sergey Ilyasov

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Beyond its role as a protocol for managing and transferring money, the Bitcoin protocol creates a complex system of economic incentives that govern its inner workings. These incentives strongly impact the protocol's capabilities and security guarantees, and the path of its future development. This article explores these economic undercurrents, their strengths and flaws, and how they influence the protocol.

Bitcoin, which continues to enjoy growing popularity, is built upon an open peer-to-peer (P2P) network of nodes.9 The Bitcoin system is "permissionless"—anyone can choose to join the network, transfer money, and even participate in the authorization of transactions. Key to Bitcoin's security is its resilience to manipulations by attackers who may choose to join the system under multiple false identities. After all, anyone can download the open-source code for a Bitcoin node and add as many computers to this network as they like, without having to identify themselves to others. To counter this, the protocol requires nodes that participate in the system to show proof that they exerted computational effort to solve hard cryptographic puzzles (proof-of-work) in order to participate actively in the protocol.


 

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