Governance challenge: Decentralized consensus

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Bitcoin Independence Day is one of the most critical days in decentralized consensus and may be one reason people use Bitcoin compared to many other cryptocurrencies.

The concept of decentralized consensus essentially makes Bitcoin the ‘People’s Money.’ Here is a brief account of this concept and what it means to you as a Bitcoin user.

What Is Decentralized Consensus?

Before diving into the impact of decentralized consensus concerning cryptocurrency, let’s start by understanding what it means.

The decentralized consensus is a set of principles that allows people to participate in a network to agree on a shared database or document. Systems that rely on this concept are often censorship-resistant, tamper-proof, and permissionless.

Decentralized consensus allows parties on a network to share and store information without relying on approval from a central authority. Even in areas such as financial ledgers where malicious members of the network may attempt to modify the shared data to fit their agenda, the principles that are included in decentralized consensus make it difficult for them and trust an option for the whole network.

According to the Bitcoin whitepaper by Satoshi Nakamoto; for decentralized consensus to work, it must contain the following three principles:

  • Peer to Peer network
  • A cryptographically-secured data structure
  • Proof of work for anyone looking to add new entries to the ledger

These principles are applied to the Bitcoin network. Thanks to the peer to peer network, anyone in the world can join. Thus a massive global network exists.

Every transaction (when one sends Bitcoin anywhere) is kept safe on a tamper-proof cryptographically-secured data structure called a blockchain.

Bitcoin mining is brought into play by the third principle. To create a new Bitcoin, every mining node or miner must solve a complex puzzle. You can compare this to mining gold from the ground, only this time, mining entails solving a computational puzzle to obtain new Bitcoin.

All miners on Bitcoin are required to leverage costs and input effort in producing a ‘proof of work’ before they propose any new data blocks.

Before any block is added to the blockchain, the miners produce proof of work, showing that they created the block. Bitcoin miners are also able to obtain the ledger of transactions on which Bitcoin is based.

What is UASF?

It is a mechanism in which the activation time of a blockchain soft fork is enforced by the full nodes, the economic majority.

A full node is a program that validates transactions and blocks. Most full nodes serve the network by allowing lightweight clients to transmit their transactions through the network and notifying them when a transaction affects their wallet.

Without full nodes, clients cannot access the peer to peer network and are forced to use centralized services. They also accept and validate nodes and transactions from other full nodes, then relay them to further full nodes. Those nodes are essentially computers owned and managed by volunteers on the Bitcoin peer-to-peer network and are essential because they keep the cryptocurrency network running.

The difference between full nodes and mining nodes or miners as they are commonly called is that the former validates blocks and transactions, while the latter creates new blocks and receives a reward once the block is added to the blockchain.

The UASF mechanism, as you will see below, takes control of the miners and gives it back to the nodes, which is what decentralization is all about.

On August 1st, 2017, a user-activated soft fork was scheduled as one of the Bitcoin network upgrades. A fork means that there will be a change to the consensus protocol used in the Bitcoin network.

The ‘soft’ part means that the rules will be tightened, allowing for backward compatibility so that nodes running older software versions can still validate new blocks. Soft forks are used to improve the operating efficiency of the blockchain by introducing new features.

Unlike hard forks, they only implement slight changes and do not disrupt the current protocol.

The First-Ever UASF (User-Activated Soft Fork)

Bitcoin developers use Bitcoin Improvement Proposals (BIPs) to communicate ideas among each other, and one that features prominently here is BIP141 (SegWit).

Bitcoin transactions are recorded permanently in files called blocks. These blocks can be considered individual pages of the Bitcoin registry and are organized linearly according to time, called a blockchain.

Each of these blocks contains:

  • A record of the Bitcoin address set to receive the award
  • A record of some or all recent transactions
  • A reference to the block right before it
  • An answer to a complex mathematical puzzle, the answer to which is specific to every block

SegWit (Segregated Witness) is a solution that was presented in a 2015 Bitcoin Scaling conference. It allowed the signature data to be separated from the transactions and moved into the block headers, thus decreasing transaction size and enabling more transactions to fit each block.

It also incorporated a malleability fix that enabled Layer 2 scaling solutions such as Lightning Network. SegWit proposed a significant level of change to the Bitcoin network, meaning that its deployment would be no small feat. It would require a substantial upgrade to the whole network and be backward-compatible to continue participating regardless of their software versions.

In the community of Bitcoin miners, there were groups, including Bitmain, that believed in SegWit2x. This meant implementing SegWit first, then increasing the maximum block size would be the best way to go.

On the other hand, the option to implement SegWit to boost transaction throughput without directly changing the block-size limit was proposed. These users were opposed to implementing SegWit2x because Bitcoin Core did not support it, and the hard fork required would cause a non-backward compatibility change to node software.

This change would also mean that the blockchain would grow almost twice as fast, making it more challenging to sync full nodes and store a full copy of the blockchain, a situation that would harm decentralization.

Most non-critical updates to the Bitcoin network have been made through miner-activated soft forks. This approach meant that miners could dictate what consensus rules to implement and veto certain upgrades regardless of what the broader community believes.

SegWit was first proposed as BIP9, and since consensus was localized among miners, the tussle between the groups pushing for SegWit and SegWit2x dragged on. Every group cited its differences and interests.

In the beginning, users supported the SegWit upgrade, but there was no consensus among the miners as the signalling got stuck at 30%.

Therefore, users devised new ways to return control into peoples’ hands, leading to the first-ever UASF.

Before Bitcoin decentralized its consensus, miners used a start time to allow other miners to signal support for any proposed upgrades. Once 95% of the miners agreed, the upgrade became ‘locked in’ and became active.

The idea of a UASF was first proposed by a pseudo-user named Shaolinfry, and one of its results became the activation of SegWit. Thanks to it, the nodes got a more considerable say in protocol changes, including adopting the SegWit upgrade without the 95% miners support signal.

The broad users agreed to adopt Segwit without SegWit2x on August 1st, 2017. Therefore, full node operators decided that they would start using the upgrade and that the blocks of miners that did not comply would be orphaned.

The resulting pressure from the UASF forced miners siding with SegWit2x to comply, bringing the endless debate to an end.

Bitcoin Independence Day proved that miners are not incentivized to make the rules but follow them and the economic majority.

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Disclaimer: The information provided on this blog is for informational purposes only and should not be taken as any form of advice.

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