Module 2

How Bitcoin Achieves Decentralization

How Bitcoin Achieves Decentralization
• In the first module we looked at the crypto basics that underlie Bitcoin and
we ended with a simple currency that we called ScroogeCoin.
• ScroogeCoin achieves a lot of what we want in a ledger‐based
cryptocurrency, but it has one glaring problem — it relies upon the
centralized authority called Scrooge.
• We ended with the question of how to decentralize, or de‐Scrooge‐ify, this
currency, and answering that question will be the focus of this session.
Centralization vs. decentralization
Centralization
• a central authority is in control of the data and functions
decentralization

• Decentralization means computation is spread across multiple nodes

instead of just one. 
 Centralization vs. decentralization
• Centralized: Online Social Networking Services (Facebook, Google)
• Decentralized: Internet, Email service and the SMTP protocol
• Decentralization is not all-or-nothing: For example, E-mail. Email
has a decentralized protocol (e.g., SMTP), but dominated by
centralized webmail services
• Similarly, while the Bitcoin protocol is decentralized, services like Bitcoin
exchanges, where you can convert Bitcoin into other currencies, and wallet
software, or software that allows people to manage their bitcoins may be
centralized or decentralized to varying degrees.
Aspects of decentralization in Bitcoin
1. Who maintains the ledger?
2. Who has authority over which transactions are valid?
3. Who creates new bitcoins?
4. Who determines how the rules of the system change?
5. How do bitcoins acquire exchange value?
Aspects of decentralization in Bitcoin
• The peer‐to‐peer network is close to purely decentralized since anybody can run a
Bitcoin node and there’s a fairly low barrier to entry. You can go online and easily
download a Bitcoin client and run a node on your laptop or your PC. Currently there
are several thousand such nodes.

• Bitcoin mining is technically also open to anyone, but it requires a very high capital
cost. Because of this there has been a high degree of centralization, or a
concentration of power, in the Bitcoin mining ecosystem. Many in the Bitcoin
community see this as quite undesirable.

• A third aspect is updates to the software that Bitcoin nodes run, and this has a
bearing on how and when the rules of the system change. One can imagine that
there are numerous interoperable implementations of the protocol, as with email.
But in practice, most nodes run the reference implementation, and its developers
are trusted by the community and have a lot of power.
Distributed consensus
Reliability in distributed systems
• Imagine the backend systems for companies like Google or Facebook.
• These companies have thousands, or even millions of servers, which form a
massive distributive database.
• This database records all the actions on the system, such as users' comments,
likes, posts and so on.
• When a new information comes in, the server needs to make sure that that
comment either gets recorded in all copies of the database, or none of them.
• If the action gets recorded in none of the databases, it's okay: it's enough to
notify the problem to the user.
• If some of the copies of the database saved it and others didn't, then there will
be a lot of troubles: the database will be inconsistent.
• Key problem motivated the traditional research on distributed consensus.
Consensus
• A consensus mechanism is a mechanism that is used in computer
and blockchain systems to achieve the necessary agreement on a
single data value or a single state of the network among distributed
processes or multi-agent systems, such as with cryptocurrencies.
• The key technical problem to solve in building a distributed e‐cash
system is achieving distributed consensus. Intuitively, you can think of
our goal as decentralizing ScroogeCoin.
Bitcoin’s key challenge
• Key technical challenge of decentralized e-cash:
distributed consensus

• or: how to decentralize ScroogeCoin

Distributed Consensus
• There are “n” nodes, each have an input value. Some nodes are
faulty or malicious.
• A distributed consensus protocol has the following two
properties:

1. The protocol terminates and all honest nodes are in agreement on

the same value

2. The output value must have been proposed by some honest node
What does this mean in the context of Bitcoins?
How consensus could work in Bitcoin
At any given time (in the bitcoin peer-to-peer network):

● All nodes have a sequence of blocks of transactions (called,

ledger or block chain) they’ve reached consensus on
● Each node has a set of outstanding transactions it’s heard
about (but not yet included in the block chain)
● For these transactions consensus has not yet happened
● Each node may have a slightly different outstanding transaction
pool
How exactly do nodes come to consensus on a block?
• One way to do this: at regular intervals, say every 10 minutes, every
node in the system proposes its own outstanding transaction pool to be
the next block. Then the nodes execute some consensus protocol, where
each node’s input is its own proposed block. Now, some nodes may be
malicious and put invalid transactions into their blocks, but we might
assume that other nodes will be honest. If the consensus protocol
succeeds, a valid block will be selected as the output.
Why consensus is hard?
There are a number of technical problems with this approach.
• Firstly, consensus in general is a hard problem since nodes might crash or be outright
malicious.
• Secondly, and specifically in the Bitcoin context, the network is highly imperfect. It’s a peer‐
to‐peer system, and not all pairs of nodes are connected to each other. There could be faults
in the network because of poor Internet connectivity for example, and thus running a
consensus protocol in which all nodes must participate is not really possible.
• Finally, there’s a lot of latency in the system because it’s distributed all over the Internet.

No notion of global time

• Byzantine generals problem: In this classic problem, the
Byzantine army is separated into divisions, each commanded
by a general. The generals communicate by messenger in
order to devise a joint plan of action. Some generals may be
traitors and may intentionally try to subvert the process so
that the loyal generals cannot arrive at a unified plan. The
goal of this problem is for all of the loyal generals to arrive at
the same plan without the traitorous generals being able to
cause them to adopt a bad plan. It has been proven that this
is impossible to achieve if one‐third or more of the generals
are traitors.
Some well-known protocols
• Example: Paxos

• Never produces inconsistent result, but can

(rarely) get stuck
So why is the problem of consensus different in
Bitcoins?
Introduces incentives
• Possible only because it’s a currency!
• So in Bitcoins we do not have to solve the consensus problem in general, but only
the one for a currency system

Embraces randomness
• Does away with the notion of a specific starting and ending point for consensus
• Consensus happens over long time scales — about 1 hour
• In summary, consensus in Bitcoins is not deterministic – Even at the end of 1 hour
nodes may not be 100% sure that their view of the block chain is the consensus view