Decentralization Slides.

Centralization

A system where control is held by a single entity or a small group

Decentralization

A system where control and decision-making are distributed across multiple participants

Ledger

A record of transactions maintained in a system

Blockchain

A cryptographically linked series of blocks containing transaction data

Mining

The process where nodes compete to solve a computational puzzle to validate transactions and secure the blockchain.

Proof of Work

A consensus mechanism that requires miners to perform computationally intensive tasks to propose the next block

Consensus

The process by which nodes agree on the state of the blockchain without a central authority.

Distributed Consensus

The challenge of reaching agreement in a network where some nodes may be faulty or malicious

Sybil Attack

An attack where a single entity creates many fake identities to manipulate a decentralized network.

Block Reward

The incentive given to miners for successfully adding a block to the blockchain

Mining Economics

The financial viability of mining depends on electricity costs

Transaction Fee

An optional fee paid to miners to prioritize transaction processing.

Fee Market

As block rewards decrease

51% Attack

A situation where a miner or mining pool controls the majority of hashing power

Longest Chain Rule

Bitcoin nodes follow the longest valid chain

Nonce

A random number miners adjust to solve the proof-of-work hash puzzle.

Target Difficulty

A threshold value that miners must generate a hash below

Byzantine Generals Problem

A theoretical problem describing the difficulty of reaching agreement in a system with potentially malicious participants.

Bitcoin’s Byzantine Fault Tolerance

Bitcoin achieves probabilistic consensus despite adversarial conditions by making reorganization beyond a few blocks statistically unlikely.

Double Spending

An attack where the same Bitcoin is spent in two transactions before one is confirmed in the blockchain.

Six-Confirmation Rule

Merchants typically wait for six confirmations to minimize double-spending risks

Identity in Bitcoin

Bitcoin nodes do not have long-term identities

Implicit Consensus

Instead of explicit voting

Hard Fork

A permanent divergence in the blockchain requiring all nodes to upgrade

Soft Fork

A backward-compatible update where old nodes still recognize new blocks

Difficulty Adjustment

A mechanism that ensures mining difficulty scales based on network-wide hash power

Self-Regulating Security

Bitcoin’s mining difficulty adjusts dynamically

Bitcoin Nodes

Nodes in the Bitcoin network that validate transactions and relay them to others.

Pseudonymity in Bitcoin

Bitcoin nodes do not have long-term identities

Sybil Attack Prevention

Bitcoin prevents Sybil attacks by requiring proof-of-work

Consensus Without Identity

Bitcoin uses proof-of-work instead of explicit identity to select block proposers

Random Node Selection in Bitcoin

Nodes are effectively selected randomly by their mining power

Implicit Consensus

Nodes do not explicitly vote; instead

Block Propagation

When a node mines a block

Consensus Algorithm Simplified

Transactions are broadcast to all nodes

Longest Chain Rule

Bitcoin nodes always follow the longest valid chain

How Nodes Accept Blocks

Nodes accept a block only if all transactions within it are valid

How Nodes Extend the Chain

Nodes build on the first valid block they receive

Attack on Consensus

Malicious nodes could attempt to extend an alternative chain

Diagram Interpretation: Transaction Flow

Transactions propagate across nodes in the peer-to-peer network

Diagram Interpretation: Block Addition

A newly mined block is forwarded to nodes

Diagram Interpretation: Chain Forking

Temporary forks may occur when multiple blocks are proposed simultaneously

Diagram Interpretation: Peer-to-Peer Architecture

Each node maintains its own copy of the blockchain and participates in consensus independently.

Security in Bitcoin Consensus

Bitcoin’s security relies on the assumption that a majority of mining power follows the protocol

Bitcoin’s Fork Handling

If multiple chains exist

Why Identity Helps Consensus

If nodes had fixed identities

Trade-Offs in Decentralization

Bitcoin’s design sacrifices efficiency for resilience

Double-Spending

An attack where the same Bitcoin is spent in two transactions before one is confirmed in the blockchain.

How Bitcoin Prevents Double-Spending

Bitcoin nodes extend the longest valid chain

Transaction Confirmations

The number of blocks added after a transaction

Bob the Merchant’s Heuristic

Bob waits for six confirmations before accepting a Bitcoin transaction as final

Malicious Node Behavior

A malicious node can attempt a double-spend by broadcasting conflicting transactions

Consensus Protection Against Invalid Transactions

Bitcoin ensures only valid transactions are included through cryptographic verification and miner incentives.

Assumption of Honesty in Bitcoin

Bitcoin does not assume miners are honest but instead uses economic incentives to align their behavior with network security.

Mining Incentives

Miners are rewarded with block rewards and transaction fees

Block Reward

The fixed amount of Bitcoin given to a miner for adding a new block

Transaction Fees

Users can include fees in transactions to incentivize miners to prioritize their inclusion in the blockchain.

Bitcoin’s Fixed Supply

Bitcoin has a maximum supply of 21 million coins

What Happens When Block Rewards End?

After all Bitcoin is mined

Why PoW Prevents Sybil Attacks

Since mining requires computational effort

Random Node Selection via PoW

Bitcoin selects block proposers in proportion to their computational power

Bitcoin Hash Puzzles

A cryptographic challenge requiring miners to find a nonce that produces a hash below a given target

Recalibration of Difficulty

The Bitcoin network adjusts mining difficulty every 2016 blocks to maintain a consistent block time of approximately 10 minutes.

Bitcoin’s 10-Minute Block Time

This interval balances security and efficiency

Cryptographic Protection in Bitcoin

Bitcoin uses cryptographic techniques to verify transactions and enforce consensus without a central authority.

Role of Consensus in Preventing Double-Spending

Bitcoin's consensus mechanism ensures that only one valid transaction for a given input is recorded on the blockchain.

Incentives for Honest Mining

Miners are rewarded with block rewards and transaction fees

Block Reward Halving

The process where Bitcoin's block reward is reduced by 50% every 210

Economic Security of Bitcoin

Bitcoin’s security depends on the assumption that miners will act honestly due to economic incentives rather than altruism.

Problem of Picking a Random Node

Bitcoin does not rely on identity-based selection; instead

Proof-of-Work as a Sybil Defense

PoW makes it computationally expensive to create many fake identities

Bitcoin’s Decentralized Lottery

Mining operates like a lottery where the probability of winning is proportional to the miner's computational power.

Mining Competition

Miners compete to solve cryptographic puzzles

Proof-of-Work Hash Puzzles

Miners must find a nonce that

Bitcoin’s Hash Rate

The total computational power in the Bitcoin network

Mining Difficulty Adjustment

Bitcoin adjusts the mining difficulty every 2016 blocks to maintain a consistent 10-minute block time.

Impact of Difficulty Adjustments

If blocks are being found too quickly

Security Assumption of PoW

Bitcoin assumes that most mining power is controlled by honest actors

Why a 10-Minute Block Interval?

Chosen to balance security and efficiency

51% Attack

An attack where an entity controlling more than 50% of mining power can alter the blockchain

Potential Effects of a 51% Attack

Attackers cannot steal coins but can censor transactions or double-spend by reorganizing recent blocks.

Energy Consumption in PoW

Bitcoin mining requires significant energy

Verifiability of Proof-of-Work

Any node can instantly verify a mined block by checking if the hash meets the difficulty target.

Mining Profitability Factors

Mining profitability depends on electricity costs

Bitcoin’s Bootstrapping Challenge

Bitcoin’s security

What Happens When a Block is Mined?

The winning miner broadcasts the new block

Consensus Algorithm in Action

Honest nodes extend the longest valid chain

Bitcoin as a Secure Financial System

Bitcoin leverages economic incentives and cryptographic security to maintain a decentralized and censorship-resistant ledger.

Trade-Offs of Bitcoin’s Design

Bitcoin sacrifices speed and energy efficiency for decentralization

Bitcoin’s Future Without Block Rewards

Transaction fees will eventually become the sole incentive for miners

Alternative Consensus Mechanisms

Other cryptocurrencies explore alternatives like Proof-of-Stake (PoS) to reduce energy consumption while maintaining security.

A 51% attacker cannot steal Bitcoin from other wallets or alter historical transactions older than a few blocks.

What Can’t a 51% Attacker Do?