Since Bitcoin is decentralised, no central authority is in control. The entire system is governed by a set of rules that apply equally to everyone. Since it is based on cryptography, these rules involve doing a lot of math to keep the system going. The system is kept going by two kinds of entities — miners and nodes.
As a user of the Bitcoin network, you primarily want to transact by sending and receiving bitcoin. When a user sends a transaction, it is propagated through the network via gossip protocol. Basically, the transaction is passed to a few nodes who check that it is valid before passing it to more nodes, continuing until all nodes connected to the network are aware of the pending transaction.
Nodes hold a full copy of the Bitcoin blockchain, which is a universal ledger system. It contains the complete transaction history of all previous bitcoin transactions. By referencing the blockchain, nodes ensure that the sender of a transaction is not spending the same BTC twice and didn’t create it out of thin air.
Once nodes validate a transaction, it’s shown in a “pending” state until a specialized node, known as a miner, or a collective of miners (mining pool), picks up the transaction. Bitcoin miners are located all over the world and compete to confirm the pending transactions. Going from a “pending” to “confirmed” state means that the transaction has been added to the universal ledger system (blockchain) and enables the recipient of the bitcoin transaction to send it to another user.
Instead of confirming transactions one by one, miners will batch pending transactions into what are known as blocks. The confirmed block is propagated across the entire network back to all nodes to ensure the block is valid and adheres to the rules of the network. Once validated, the nodes add the block to the previous blocks, thus creating a blockchain.
At this point, the entire network has witnessed this transaction being sent by the user, validated by each node, and confirmed by the miner. Final settlement is achieved and funds are irreversibly passed from the sender to the receiver. This process, relying on thousands of volunteer nodes and competing miners distributed across the world, is repeated for each and every transaction.
Running through this simple transaction example, you can start to see how nodes and miners differ from each other. They both play crucial roles to the network, and have their own checks and balances to ensure decentralization. Now let's dive a little deeper into the roles of each.
What Do Bitcoin Miners Do?
Miners, simply put, have 3 roles.
Secure the blockchain
Participate in the fair distribution of new bitcoins
Mining bitcoin is a costly endeavor, requiring specialized hardware and using significant amounts of electricity. On top of those economic factors, bitcoin mining also requires significant expertise and entails a lot of risk (unlike operating a node). For example, miners can lose millions of dollars overnight due to extreme weather, floods, fires, and more.
To incentivize people to spend resources and take on long-term risk, the Bitcoin network provides miners with the opportunity to earn revenue. Every transaction includes a transaction fee and every block contains a subsidy of newly issued bitcoins, both of which are paid to whichever miner adds the given block of transactions to the blockchain.
Because miners must compete and spend resources to earn newly issued coins, bitcoin is more similar to gold and other commodities than to fiat currencies with unlimited supplies. This unavoidable cost to mine bitcoin is a critical part of its value proposition, as it makes for a relatively fair distribution of newly issued coins and it results in bitcoin being extremely difficult to attack. Nodes play an important role in this as well (as we will describe in the next section).
Currently, about 18.6 million bitcoin have already been distributed to miners through the block subsidy, and this will continue until all 21 million bitcoins are distributed around the year 2140. At that point, miners will solely earn transaction fees for confirming transactions and securing the network. However, miners are not all-powerful, but rather they are more like paid servants of the network. Ultimately, miners must play by the rules enforced by nodes in order to be rewarded with bitcoins. Nodes, on the other hand, are the true rulers of the network.
How Bitcoin Nodes Keep Miners in Check?
Unlike mining, running a bitcoin node is not very costly (it’s typically in the $150-400 range). However, nodes are equally if not more important than miners in achieving decentralization. The roles of nodes are to:
Keep a historic record of transactions
Dictate and enforce the rules of the network.
In simple terms, nodes ensure that everybody — from miners to users and other nodes — plays by the rules. This can be done out of self-interest. Each user, wallet, company, mining pool, and exchange that runs a node is doing so in part to ensure they are not being cheated. Everyone running a node carries a copy of the blockchain and is responsible for maintaining and updating their copy.
As transactions are propagated and confirmed, node operators are validating that these transactions meet the rules of the network. If a user receives a transaction that creates 1,000,000 bitcoin out of thin air, the user (and all other nodes on the network) will reject the transaction. If any invalid transaction somehow makes it into a block, all the nodes will reject the entire block and wait for another to be mined which doesn’t contain any invalid transactions.
Bitcoin is based on consensus. All nodes are in agreement to the rules of the network and the state of the blockchain, and will ignore anybody who is misaligned.
While there is no direct revenue to be earned by running a node, it is important to run one to ensure you're interacting with the network safely and securely. A node can be installed on any computer with enough storage capacity. A popular approach is to buy $150-$200 worth of components and run a dedicated node on a raspberry pi. In doing so you can truly be your own bank by running and auditing the Bitcoin network.
Since there are thousands of nodes worldwide, the Bitcoin network is very hard to shut down. Any rogue node can be identified by comparing it with the rest and can be isolated quickly. Anyone with a storage device with sufficient space connected to the internet can run a node.
No one miner or node can control the network. They each put checks and balances on each other to ensure no one cheats the system. A monetary network that is open and permissionless for anyone and everyone to participate can be the backbone of the most resilient, accessible, and inclusive financial system in the world. This is the power of open networks. This is why millions of people around the world have already voluntarily joined the network. Whether you choose to run your own full node or become a miner, you’re taking part in the open and inclusive Bitcoin revolution. A revolution getting stronger and more unstoppable with each new participant in it.