Discovering Bitcoin Part 7: The Missing Pieces

This is the seventh and final installment of Bitcoiner Giacomo Zucco’s series “Discovering Bitcoin: A Brief Overview From Cavemen to the Lightning Network.” Read the Introduction to his series, Discovering Bitcoin Part 1: About Time, Discovering Bitcoin Part 2: About People, Discovering Bitcoin Part 3: Introducing Money, Discovering Bitcoin Part 4: A Wrong Turn (New Plan Needed)!, Discovering Bitcoin Part 5: Digital Scarcity and Discovering Bitcoin Part 6: Digital Contracts.

As we conclude our “Discovering Bitcoin” series, we will build on the use of digital signatures and of the CoinJoin paradigm to explore concepts of unique chronology, mining fees and off-chain transactions.

Proving Unicity: Timechain

We are finally at the end of our exploration of Plan ₿, back again to the question “When?” from whence we started. 

It’s an important question, as it justifies the introduction of the so-called “blockchain technology,” a decidedly abused expression that, in its original meaning, just labeled the answer to a problem of unique chronology. (It’s interesting, in this regard, that Satoshi himself called this structure “timechain,” which is also the term we are going to use here … sorry, Peter!).

Let’s try to understand what problem it solves, by getting back to our little story. You designed a digital cash system in which issuance and ownership are both decentralized, leveraging puzzles and signatures in a clever combination.

But how do you prevent users from double-spending the same UTXO? If Carol, a dishonest user, transfers sats to an address controlled by Daniel, and then signs another transaction that retransmits those very same sats to an address controlled by herself, which transaction will the network enforce? They would both be “valid” from the point of view of the chain of signatures and scripts, and both would point to a valid initial issuance, with a correct PoW difficulty.

And how do you prevent “miners” from lying about the correct timestamp, tricking the difficulty adjustment algorithm to increase the issuance rate? If the miner Minnie manages to solve hundreds of PoW puzzles at low difficulty, but she includes forged timestamps that depict the solutions as only 10 minutes apart from each other, how can a generic user, maybe just recently connected to the system, discover and prove such dishonest behavior?

Within your previous e-gold experiment, your trusted timestamp server trivially solved both issues. But now there is no central server, so who defines the unique chronology of events? 

If the network could somehow “vote,” it could reach a “democratic” consensus about it. But voting processes, while feasible in systems with a fixed number of known actors (often called “federations”), can’t work within dynamic sets of unknown, anonymous actors. You can’t simply use “node count” as a proxy for voting rights, since every user could pretend to “be” millions of different nodes in what is known as a “Sybil attack.” You need another, “Sybil-resistant” way to push all the nodes to find (and keep) consensus over one single, consistent, immutable history.

Unfortunately, a deterministic and final solution based on mathematics is theoretically impossible. But a statistical and asymptotic solution based on economics is practically possible, and you are smart enough to find it. This is the idea: Every time miners try to solve PoW puzzles, they should include in their messages compact snapshots of the current transactional timeline! 

Instead of just their issuance messages, they should pass through the hash function more complex “blocks” of information, each containing (along with said issuance message, a timestamp and a random number needed to solve the puzzle at the correct difficulty) the solution of the previous block (which had been found by other miners about 10 minutes before) and a list of transactions recently made by other users.

A block that contains transactions already included in previous blocks is considered invalid. A block carrying a timestamp that is significantly incompatible with the previous ones is also discharged.

Using this trick, all actors are incentivized to converge on a consistent version of the same chronology. Minnie could include a valid transaction contradicting (double-spending) a previously confirmed one, or alter the timestamp to trick the difficulty adjustment, but then other nodes would reject such a block, and she would lose the value of the new issuance, having wasted time and energy for nothing. 

Miners spend money to solve puzzles, and thus it’s quite safe to assume they want to enjoy the associated rewards, creating blocks that aren’t rejected, at least in scenarios where they only follow financial incentives endogenous to the system.

Mining Fees

This solution, while brilliant, still lacks incentives for miners to include other…

Article Source…