How Bitcoin achieved decentralization
Now, let’s take a closer look at the decentralization of Bitcoin. If you are interested in cryptocurrencies, you may have heard the term mining. Mining means excavating coins, just like mining gold. If Bitcoin is successfully mined, that amount of Bitcoin is newly issued on the network, and the miner can receive the issued Bitcoin as a reward. Ok, so we know money (coins) can be earned by mining, but why is this kind of mining necessary?
Earlier, it was said that in a decentralized system, participants play a role by freely participating and contributing. Is there any reason why people should participate in this work without any reward? If there is a 'reward mechanism' to induce people to participate, and if the received reward becomes more valuable in the future, wouldn't people voluntarily participate?
In this regard, a mechanism is needed that can ensure participants are rewarded for maintaining the network they've constructed. In the past, the reward itself could not be distributed by someone, so the concept of currency issuance was applied. Over time, the issuance volume is controlled to impose scarcity, and it is the mining of Bitcoin that develops into a larger ecosystem. In summary, mining can be seen as 'rewards that provide motivation to participate as network members'.
Act of Mining: Proof of Work
The basic working method of mining applied to Bitcoin is 'reward as much as the amount of computation contributed to the network'. If we look at how mining works, participants begin to solve common problems that take a very long time for computers to calculate. The first participant to solve the problem notifies the network that he or she solved the problem first. The other participants then challenge themselves to solve a new problem again. Each time a problem is solved, a block is created, Bitcoin is issued, and the transactions that have occurred in the meantime are finalized.
Why use computers to do calculations to solve long-running problems? This answer is related to the structure of the blockchain. "Successful in mining = creating a block = issuing new currency" all mean the same thing. If you are the first to solve the problem by mining, you become the block producer, and the newly issued Bitcoin is rewarded to you. As mentioned earlier, "Blockchain is easy to detect even if the transaction details are forged," but let's think about what would happen if all the transactions were changed.
In order to find the forged transaction history, reverse tracking is performed from the information stored in the current blockchain. If the data was wrong from the start of the reverse tracking, it would not be possible to identify which transaction history was forged. Therefore, there needs a way to prevent this from happening.
So, if a block is designed to require a huge amount of computation every time it is created, then changing all transactions would require a lot more computation. If the amount of computation is impossible even with a supercomputer, then there will be no falsification of information. So, mining is about achieving security by solving these problems, and because it has contributed to the security of the Bitcoin network, Bitcoin is issued as a reward. The act of solving a problem here is called Proof of Work. It means proving to the network that I solved the problem well.
In addition, computation of the computer is required, and the more the amount of computation, the faster the probability of solving the problem and the higher the probability of getting a reward. As a result, participants participate in mining using the computational amount of the computer to contribute to the security of the network and receive rewards. Prior to the advent of Bitcoin, there was no mechanism in this way to induce participation by issuing rewards through the issuance of currency in a decentralized environment, and to be safe from forgery as the number of participants increases. In the end, in order to achieve blockchain and decentralization, a system called a reward currency was needed, and this is why Bitcoin was able to become the first cryptocurrency.
Proof of work, i.e. solving problems, must provide a fair environment. So the network is in a state where everyone implicitly agrees to solve the problem on the latest block. The system prevents the hard work from becoming useless due to a participant working on a wrong block, the participants always work on the latest block. With the latest block, the block with the most amount of computation is inevitably the longest, so working on the longest blockchain becomes the latest block. This is called the Longest Chain Rule.
A sufficient amount of computation is required every time a block is created (each time a problem is solved), and a block created on top of it requires more computation. When blocks are accumulated like this, in order to manipulate previous transaction details, all existing blocks will have to be changed. In addition, we need to increase the length faster than the longest chain chosen by miners participating in the network now.
The combination of the proof-of-work method and Longest Chain Rule described above is called consensus. In cryptocurrency, consensus means how to safely create a blockchain among network participants (such as miners). The Bitcoin network is the first operational example in which an unalterable data store is achieved through consensus in a decentralized network, a system that was previously only possible with guarantees from a trusted entity.
We just learned about the principles of Bitcoin and blockchain. Through this principle, Bitcoin has significance as a global value transfer network that was difficult to construct in the past, and as a means of storing value by adding scarcity through a decrease in the amount of mining over time. Despite the advancement of technology, Bitcoin has become symbolic as the very first infrastructure that maintains security, uniqueness, and safety. It still holds the highest total value among cryptocurrencies.
You have now understood the meaning of decentralization, the principle of blockchain, and the meaning of Bitcoin. At this point, it may seem that the function of Bitcoin is not a big deal until a new concept of the smart contract is introduced to dramatically improve this view. We will learn about this in the next part.