Hi all, I just uploaded a new video to my "BitcoinOudLoud" youtube channel:
Thanks for watching/reading! Here's the script:
The term “Peer-to-Peer Electronic Cash” is thrown around a lot in the Bitcoin space, but a newcomer could easily be confused when they find out that there are transaction fees in volved in this supposedly “Peer-to-Peer” system , and that a mysterious group called the “miners” c laim s those fees when adding transactions to the blockchain. That situation might seem to imply that Bitcoin requires a trusted third party (the miners), and so is not really “peer to peer”. Such a reaction would be understandable, since most situations where one will have encountered fees will have involved a trusted third party, and it’s easy to assume that the miners are fulfilling that same role for Bitcoin. But as it turns out, t he function of Bitcoin’ s miners is so fundamentally different than that of a trusted third party that no reasonable definition thereof could apply to them.
The main reason it would be inaccurate to describe miners as a trusted third party is that the miners never have custody of the funds being transferred. While services like Paypal or Venmo require you to trust them with the custody of your money ( since technically you need their permission to withdraw ), miners only ever have the transaction information provided to them by the users. Bitcoin uses a public key /private key system, the inner workings of which are beyond the scope of this video , but the ramifications of that system are that, in order to send Bitcoin to someone else, a user need only sign a transaction cryptographically and send it to the mining network. That signed transaction, which sends the funds directly from one address to another, is all the miners ever see and interact with.
But if they aren’t holding on to the money, and aren't really even part of the "transfer", then what are miners actually doing? Well, the miners are there to perform a very specific job that is so different than anything that came before Bitcoin that there is almost nothing to relate it to. Their job is to invest “work” into the blockchain and reach consensus on the state of the network (that is to say, consensus on which transactions have and haven’t happened yet). Arriving at consensus about the order of transactions prevents “double spends”, and the work invested to reach consensus secures the network against attackers, who would need to perform more work than the whole rest of the network combined to attack it. Neither of those services is remotely similar to services provided by trusted third parties in other financial situations. They are, instead, more like independent contractors whose job is to maintain and secure the network. In fact, the only “control” that a miner has is over whether or not to include a given transaction in their next block.
That is some power, however, which might lead one to ask: “So even if they’re not technically a ‘trusted third party’, aren’t you still trusting the miners to include your transaction?” The answer to that question is, at the very least, "no, not directly", for two reasons. The first reason is that the system provides incentives for miners to include transactions. Not only do miners claim the fees of the transactions they include, but those fees are also, of course, paid in the currency Bitcoin itself. The value of that currency is directly tied to its usefulness as a medium of exchange and, if a miner were to refuse to process certain transactions, they would, in doing so, degrade the usefulness of the currency in which they are paid, hurt ing its value, and thereby reducing their own profits. As long as a miner is profit motivated, you can trust that the system aligns their incentives with processing as many transactions in each block as they can, because to do so increases the usefulness (and therefore value) of the currency itself, which increases their profits.
The second reason is that, while “the miners” are often referred to as a collective, they are actually not a collective at all. Miners are competing with one another to add the next block to the blockchain. If any one miner refuses to include certain transactions (perhaps because they have been compromised by a government that wants to censor transactions to a given address), another miner will happily include those censored transactions in their next block to claim the included fees and restore faith in the function of the system. This distributed, competitive nature of mining is part of what makes Bitcoin so robust. As long as Bitcoin mining remains sufficiently decentralized (so that it would be impractical for a malicious third party to compromise more than 50% of the hashpower*), one doesn’t need to worry about “trusting” the miners to include transactions, and can instead trust the competitive, decentralized, permission-less nature of mining itself.
Now, exactly what level of mining decentralization is sufficient for it to be impractical for a malicious third party to compromise more than 50% of the hashpower is not clear. What is clear, however, is that, given the goal of the system and the profit incentives in place, a mining network is likely to become more decentralized the more transactions it processes, and this was the case for the first several years of Bitcoin’s existence. Anyone who values censorship resistance should make growing Bitcoin’s ecosystem as a peer to peer electronic cash system a priority, and anyone whose goal is to stifle it either lacks an understanding of the incentives built into Bitcoin, or wishes to see it fail.