Satoshi on Mining¶
Mining is the process by which new Bitcoin is created and transactions are confirmed. Satoshi Nakamoto designed mining as the economic engine of the Bitcoin network -- simultaneously securing the chain, distributing new coins, and aligning individual incentives with collective security. Through the whitepaper, mailing list correspondence, and forum posts, Satoshi explained every aspect of this mechanism, from its theoretical foundations to its practical implications.
Mining as Coin Distribution¶
In the whitepaper, Satoshi established that mining solves two problems at once -- security and distribution:
"By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
The analogy to physical mining was deliberate. Just as gold enters circulation when miners expend real resources extracting it from the earth, bitcoins enter circulation when miners expend computational energy solving cryptographic puzzles. In both cases, new money costs something to produce, ensuring it cannot be created arbitrarily.
In the v0.1 release notes, Satoshi provided the specific issuance schedule:
"Total circulation will be 21,000,000 coins. It'll be distributed to network nodes when they make blocks, with the amount cut in half every 4 years."
-- Satoshi Nakamoto, Cryptography Mailing List, January 9, 2009
He added practical instructions for the earliest miners: "You can get coins by getting someone to send you some, or turn on Options->Generate Coins to run a node and generate blocks. I made the proof-of-work difficulty ridiculously easy to start with, so for a little while in the beginning a typical PC will be able to generate coins in just a few hours. It'll get a lot harder when competition makes the automatic adjustment drive up the difficulty."
Proof of Work¶
The security of Bitcoin rests on proof of work -- a concept borrowed from Adam Back's Hashcash. The whitepaper describes the implementation:
"To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back's Hashcash, rather than newspaper or Usenet posts. The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
In correspondence, Satoshi elaborated on the mechanics and their implications for fairness:
"The proof-of-work is a Hashcash style SHA-256 collision finding. It's a memoryless process where you do millions of hashes a second, with a small chance of finding one each time. The 3 or 4 fastest nodes' dominance would only be proportional to their share of the total CPU power. Anyone's chance of finding a solution at any time is proportional to their CPU power."
-- Satoshi Nakamoto, Cryptography Mailing List, November 17, 2008
This proportionality is critical: no single node can monopolize block creation. The process is random, like a lottery. A miner with 10% of the network's computing power will, on average, find 10% of the blocks -- but they might find the next block, or they might not find one for hours. This randomness ensures decentralization even when computing power is unequally distributed.
Satoshi also addressed why proof of work solves the problem of determining representation in a network where identities can be faked:
"The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
The identity that matters in Bitcoin is not a name or an IP address but the ability to supply computational work:
"The credential that establishes someone as real is the ability to supply CPU power."
-- Satoshi Nakamoto, Cryptography Mailing List, November 17, 2008
The Self-Evidence of Proof of Work¶
One of Satoshi's most important observations about proof of work is that it is self-verifying -- it does not require trusting the source:
"Proof-of-work has the nice property that it can be relayed through untrusted middlemen. We don't have to worry about a chain of custody of communication. It doesn't matter who tells you a longest chain, the proof-of-work speaks for itself."
-- Satoshi Nakamoto, BitcoinTalk, August 7, 2010
And in an earlier email:
"The proof-of-work chain is itself self-evident proof that it came from the globally shared view. Only the majority of the network together has enough CPU power to generate such a difficult chain of proof-of-work. Any user, upon receiving the proof-of-work chain, can see what the majority of the network has approved. Once a transaction is hashed into a link that's a few links back in the chain, it is firmly etched into the global history."
-- Satoshi Nakamoto, Cryptography Mailing List, November 9, 2008
Difficulty Adjustment¶
To maintain a consistent block time as computing power changes, Satoshi implemented an automatic difficulty adjustment:
"To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they're generated too fast, the difficulty increases."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
Satoshi specified the target parameters in correspondence:
"The target time between blocks will probably be 10 minutes. Every block includes its creation time. If the time is off by more than 36 hours, other nodes won't work on it. If the timespan over the last 62430 blocks is less than 15 days, blocks are being generated too fast and the proof-of-work difficulty doubles. Everyone does the same calculation with the same chain data, so they all get the same result at the same link in the chain."
-- Satoshi Nakamoto, Cryptography Mailing List, November 10, 2008
The difficulty adjustment ensures that the rate of new bitcoin creation remains predictable regardless of how much computing power joins or leaves the network:
"As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future."
-- Satoshi Nakamoto, Cryptography Mailing List, November 8, 2008
On BitcoinTalk, Satoshi confirmed the operational target: "The difficulty adjustment is trying to keep it so the network as a whole generates an average of 6 blocks per hour."
The Security Argument¶
Satoshi made a game-theoretic argument for why miners would behave honestly, even if they had the power to cheat:
"If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
Even if an attacker succeeds in overpowering the network, the damage they can do is strictly limited:
"Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
In correspondence, Satoshi reinforced this point with a memorable analogy:
"Even if a bad guy does overpower the network, it's not like he's instantly rich. All he can accomplish is to take back money he himself spent, like bouncing a check. To exploit it, he would have to buy something from a merchant, wait till it ships, then overpower the network and try to take his money back. I don't think he could make as much money trying to pull a carding scheme like that as he could by generating bitcoins. With a zombie farm that big, he could generate more bitcoins than everyone else combined."
-- Satoshi Nakamoto, Cryptography Mailing List, November 3, 2008
The implication is that the rational attacker is better off mining honestly. The cost of attacking the network exceeds the potential reward from fraud.
The Honest Majority¶
Satoshi described how even unlikely participants -- like operators of botnets -- would be incentivized toward honest mining:
"There would be many smaller zombie farms that are not big enough to overpower the network, and they could still make money by generating bitcoins. The smaller farms are then the 'honest nodes'. The more smaller farms resort to generating bitcoins, the higher the bar gets to overpower the network, making larger farms also too small to overpower it so that they may as well generate bitcoins too. According to the 'long tail' theory, the small, medium and merely large farms put together should add up to a lot more than the biggest zombie farm."
-- Satoshi Nakamoto, Cryptography Mailing List, November 3, 2008
He added a striking observation about the secondary effects: "The Bitcoin network might actually reduce spam by diverting zombie farms to generating bitcoins instead."
The Longest Chain Rule¶
Satoshi was emphatic about a fundamental protocol rule that is essential to understanding how mining produces consensus:
"It is strictly necessary that the longest chain is always considered the valid one. Nodes that were present may remember that one branch was there first and got replaced by another, but there would be no way for them to convince those who were not present of this. We can't have subfactions of nodes that cling to one branch that they think was first, others that saw another branch first, and others that joined later and never saw what happened. The CPU power proof-of-work vote must have the final say. The only way for everyone to stay on the same page is to believe that the longest chain is always the valid one, no matter what."
-- Satoshi Nakamoto, Cryptography Mailing List, November 9, 2008
Node Consensus¶
The whitepaper describes the network's operating procedure in six steps: new transactions are broadcast to all nodes; each node collects transactions into a block; each node works on finding a proof-of-work; when found, the block is broadcast; nodes accept valid blocks; and nodes express acceptance by working on the next block using the accepted block's hash.
Satoshi noted the elegance of this design:
"The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism."
-- Satoshi Nakamoto, Bitcoin whitepaper, October 31, 2008
The Chain Analogy¶
In a November 2009 forum post, Satoshi offered an intuitive explanation of why miners must build on the latest block:
"Think of it as a cooperative effort to make a chain. When you add a link, you must first find the current end of the chain. If you were to locate the last link, then go off for an hour and forge your link, come back and link it to the link that was the end an hour ago, others may have added several links since then and they're not going to want to use your link that now branches off the middle."
-- Satoshi Nakamoto, BitcoinTalk, November 22, 2009
The GPU Arms Race¶
In December 2009, as Bitcoin was still in its infancy, Satoshi foresaw the coming computational arms race and tried to slow it:
"We should have a gentleman's agreement to postpone the GPU arms race as long as we can for the good of the network. It's much easer to get new users up to speed if they don't have to worry about GPU drivers and compatibility. It's nice how anyone with just a CPU can compete fairly equally right now."
-- Satoshi Nakamoto, BitcoinTalk, December 12, 2009
He also observed that faster hardware does not create more Bitcoin -- it only changes how the fixed reward is distributed:
"The average total coins generated across the network per day stays the same. Faster machines just get a larger share than slower machines. If everyone bought faster machines, they wouldn't get more coins than before."
-- Satoshi Nakamoto, BitcoinTalk, December 12, 2009
This insight is fundamental to understanding Bitcoin's economics. Mining is a zero-sum competition for a fixed reward. Better hardware improves an individual miner's share but does not increase the total supply. This is in stark contrast to fiat currency, where the central bank can always create more.
The Future of Mining: Server Farms¶
Satoshi anticipated the professionalization of mining long before it occurred. In November 2008, he predicted:
"At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware. A server farm would only need to have one node on the network and the rest of the LAN connects with that one node."
-- Satoshi Nakamoto, Cryptography Mailing List, November 2, 2008
By July 2010, he was even more specific:
"I anticipate there will never be more than 100K nodes, probably less. It will reach an equilibrium where it's not worth it for more nodes to join in. The rest will be lightweight clients, which could be millions."
-- Satoshi Nakamoto, BitcoinTalk, July 14, 2010
And:
"The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user runs their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don't generate."
-- Satoshi Nakamoto, BitcoinTalk, July 29, 2010
Mining and Energy¶
Satoshi addressed the energy criticism directly, turning the argument on its head:
"The heat from your computer is not wasted if you need to heat your home. If you're using electric heat where you live, then your computer's heat isn't a waste. It's equal cost if you generate the heat with your computer. If you have other cheaper heating than electric, then the waste is only the difference in cost. If it's summer and you're using A/C, then it's twice."
-- Satoshi Nakamoto, BitcoinTalk, August 9, 2010
He predicted mining would migrate to areas with cheap energy:
"Bitcoin generation should end up where it's cheapest. Maybe that will be in cold climates where there's electric heat, where it would be essentially free."
-- Satoshi Nakamoto, BitcoinTalk, August 9, 2010
He also identified three categories of miners who would sustain the network:
"Some places where generation will gravitate to: 1) places where it's cheapest or free 2) people who want to help for idealogical reasons 3) people who want to get some coins without the inconvenience of doing a transaction to buy them."
-- Satoshi Nakamoto, BitcoinTalk, August 15, 2010
His most powerful defense of mining energy was the comparison to gold:
"It's the same situation as gold and gold mining. The marginal cost of gold mining tends to stay near the price of gold. Gold mining is a waste, but that waste is far less than the utility of having gold available as a medium of exchange. I think the case will be the same for Bitcoin. The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste."
-- Satoshi Nakamoto, BitcoinTalk, August 7, 2010
Transition to Fees¶
Mining rewards are designed to decrease over time, with transaction fees eventually replacing the block subsidy:
"In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes."
-- Satoshi Nakamoto, BitcoinTalk, February 14, 2010
Satoshi anticipated this transition and built it into the protocol from day one. He also expressed a practical philosophy about fees:
"If you're sad about paying the fee, you could always turn the tables and run a node yourself and maybe someday rake in a 0.44 fee yourself."
-- Satoshi Nakamoto, BitcoinTalk, February 14, 2010
On the question of free transactions, Satoshi believed there should always be some:
"I don't think the threshold should ever be 0. We should always allow at least some free transactions."
-- Satoshi Nakamoto, BitcoinTalk, September 7, 2010