Emerging Problems With Bitcoin’s Incentive Structure

The Current Incentive Structure of Bitcoin

To understand how Bitcoin’s current incentive structure works, it is important to understand the different actors in the network, along with the different ways each actor can behave. There are generally three different actors in the Bitcoin network, each defined by their level of participation and commitment of resources: wallet holders, full nodes, and miners. (Note: there are also light clients, which are in between wallet holders and full nodes, but I omit these users as they aren’t particularly relevant to the ideas discussed.)

Controlling a wallet (essentially a public-private key pair, in which the public key is the wallet holder’s bitcoin address) is the most basic form of participation in the Bitcoin network. Having a Bitcoin wallet allows the holder of the wallet’s private key to manage the Bitcoin balance at the private key’s associated public address; the user can send Bitcoin from their public address to another address. A wallet holder’s main interaction with the Bitcoin incentive structure is the transaction fee they pay to the miner who includes their transaction in a block in the Bitcoin blockchain. The higher the transaction fee the wallet user is willing to pay, the more likely their transaction will be included in the next block. …

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Dhruv Luthra

using ones and zeros to trick rocks into doing magic

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