Can bitcoin protocol be changed to add economic incentives to validating nodes?

Question

We all want more decentralized bitcoin network and more people to run nodes. However, as we know that things are driven more by market economics rather than philanthropic or feel good factors. Similar economics driven adoption worked for EV by making them better/cheaper in long term. Things like carbon tax have also been been helpful to create economic incentive for a cleaner environment.

Is there a way to change bitcoin protocol to achieve something like this? Maybe the validating nodes can somehow prove that they have verified the blocks or utxos. Privacy is a current known incentive of running nodes however it is not economically very tangible and is not dissuading large number of users from using centralized wallet services.

Answer 1

I don't think it is possible. There are a few problems to incentivizing the operation of nodes.

1. When you pay people to run nodes, people running multiple nodes provide less value but earn more for the same effort. In the worst case, you may be paying botnets to run nodes on other people's hardware.
2. It's hard to prove that you're actually validating, because it is indistinguishable from just forwarding information from another node that does the validation.
3. Validating the blockchain is meaningful to the operator of the node as it provides them with a reliable copy of the network's state. It's not easy to delegate the work: to check whether someone has the correct state, you need a second source of the correct state. In the end, you need to validate in order to verify if another copy is sound. But if you're validating the blockchain yourself, you won't be interested in acquiring the data.
4. Nodes play an abstract role in the network to make the game theory work: they ensure that everyone is following the rules that the user is enforcing. They are passive observers for the authoring of the blockchain. If they were to be paid by the Bitcoin protocol, the network would need to become aware of specific nodes to track them. This would require persistent identity, some sort of availability tracking, and/or their participation in the authoring of the blockchain. None of those things are desirable.

Running a node is inherently something users do for themselves. It should be as accessible as possible. Adding money to the mix makes the overall outcome worse, not better.

Answer 2

I think you've got your reasoning backwards. The reason we want more people to run nodes is because people only run nodes if they get value out of it, so more people running nodes means more people getting value.

If you incentivized people to run nodes, then they would be running nodes even if they produced no value at all. Of what possible benefit would that be to anyone? They would validate blocks and then throw away the results of the validation (since nobody has any use for them). How does that help anything?

Your reasoning is somewhat like this: People with white hair are more likely to get cancer. So we should pay people to dye their hair brown so we'll have fewer people with white hair and thus less cancer.

Yes, it's a good sign when people run nodes because that means that people are getting value out of bitcoin that exceeds the cost to run a node. It means that there are lots of people getting that value. But if you incentivize people to validate blocks, they'll validate blocks even if they have no good reason to, don't care if the blocks are valid or not, have no use for that information, and do nothing with it.

Answer 3

Can bitcoin protocol be changed to add economic incentives to validating nodes?

I think that would have to be a hard fork, a different currency.

Maybe the validating nodes can somehow prove that they have verified the blocks

Validation is not a service. No full nodes care whether other nodes do any validating. It isn't something anyone should pay for because all nodes, even SPV nodes, must themselves validate what data they receive to the fullest extent possible using whatever data they have stored locally or can otherwise obtain and cross-check. Just because you pay money to someone doesn't make them trustworthy.

Answer 4

However, as we know that things are driven more by market economics rather than philanthropic or feel good factors.

Running a bitcoin node is more than just helping the network. One recent tweet summarizes it in the best way possible, running a node is nothing but downloading the bitcoin implementation software, install and run like lot of other software:

https://twitter.com/rot13maxi/status/1479886017419255819

Pruned nodes can be used if space is concern. Lot of bitcoin projects have made it easier to use the full node you run with just few clicks, some changes in config etc. Example: Umbrel

Main benefits of Bitcoin full node:

1. Security
2. Privacy
3. Enforce consensus rules

Other ways of using Bitcoin involve different trust assumptions. Neutrino nodes are helpful for many lightning projects.

Is there a way to change bitcoin protocol to achieve something like this?

The process to change anything in Bitcoin protocol:

1. Create BIP and share with others. Discuss everything involved.

2. Code implementation.

3. Get consensus on activation mechanism.

4. Miners signaling followed by activation.

5. Miners can follow the new consensus rules else their blocks will be rejected by full nodes. Economic nodes play an important role.

Answer 5

Though not the answer, I’d like to put some light on whether nodes should or should not be rewarded for validation:

• using a light node wallet puts the wallet itself at (limited) risk rather than the whole network. For example even if all full nodes are malicious, users can resort to running their own full-nodes (there are less likely fork scenarios though). Users are responsible for security of their light wallets in the same way they responsible for security of their private keys.

• The network can survive and keep being decentralized (and contain valid data) as long as there is no monopoly on mining and at least one full copy of block-chain(s) exists (miners or at least mining pools usually have full copy).

• SPV (simple payment verification) is robust to attacks aimed at stealing funds directly from wallet if you follow n-confirmation rule. Light wallets are less robust to eclipse attacks, 1-confirmation attacks (full node can hide new transactions and longest chains from users) and maybe some more exotic types.

• there are non-monetary incentives: https://en.bitcoin.it/wiki/Clearing_Up_Misconceptions_About_Full_Nodes#Myth:_There_is_no_incentive_to_run_nodes_so_the_network_relies_on_altruism

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P. S. with that said while I’m not a big fan of PoS - using simplified overlay version of PoS (operator/stakeholder locks funds conditioned on its own “good behavior”) combined with direct rewards as a secondary security measure to increase availability, prevent sybil-attacks and de-incentivize full nodes from cheating could work and stimulate running more full nodes.

Although as it mentioned in other answers - proving that the node is full is hard to impossible, so it would only guarantee that one node doesn’t pretend to be a group of nodes and it could also give mechanisms for penalizing malicious nodes (prevent them from censorship for example). The node would be rewarded exclusively for broadcasting transactions (and penalized for not doing so), they would not be rewarded for other light-node to full-node interactions (like requesting a history etc).

Such hypothetical mechanism would not require changes to bitcoin consensus or existing protocols, it would only require change of light wallet’s signing logic (the users wallet would add additional “full node reward output” in transaction) and maybe some overlay protocols to penalize censorship and unavailability (it would have to be overlay because bitcoin Script is not practically powerful enough to check proofs inside contracts).

However, again as it was mentioned, merchants and wallet providers are not monopolized and naturally abundant (thanks to competition) so introducing additional full-node fees for this type of security may be a little bit too much, but who knows :).

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Note: In theory, PoS as secondary verifier would also improve safety of 1-confirmation transactions as was argued in earliest (before Eth and others were even conceived) btc-related discussions involving @QuantumMechanic, but in practice stakeholder’s “approval” is incompatible with PoW (stakeholder/SPO has no way of knowing if miners would continue building on top of block stakeholder/SPO chose). So it could only be applicable to prevent Sybil attacks, penalize censorship and increase availability.

Answer 6

Very interesting conversation. I am currently downloading the blockchain. It's currently about 33% complete. My intent to start with was to help secure the network but an interesting point is being made here - namely the absense of reciprocal value from the network. I was first attracted to gold about 20 years ago when I realized that a financial system using a fixed amount of currency causes value to increase over time. Exactly opposite of a fiat system that gathers value without returning value which over time degrades the social structure. I have a friend that has a woodshop and all of his equipment was made in the 60s and 70s and those machines are extremely solid and well built - still functioning perfectly thanks to the gold standard. This is the type of value that sound/hard money fosters which surely is not what we experience with the throw away crap we are presented with these days (although I will admit that there are still good, solid products being made despite the fiat system. Integrity is to blame). Concerning this conversation, it seems hypocritical of bitcoin to not be able to provide value back to the nodes for the value they provide - sounds like the maiden voyage of bitcoin has a hidden fiat tendency and is not honoring the proof-of-work model it's built on. What does this say about bitcoin and the future of value it offers when it begins to contradict it's own principles? Starting off with a solid foundation is key. This conversation is getting me to rethink my pervious commitment to 'help secure the network' when it's not reciprocating my 'proof of work'. Guaranteed that Satoshi would immediately see the contradiction and work to resolve this discrepancy.

Answer 7

TL;DR I believe it is possible if bitcoin were to change to a different consensus mechanism. (A hard fork.)

Currently in the bitcoin network only miners get paid, and nodes are operated by volunteers (in the sense that they don't get the rewards miners do).

For a truly decentralized system all block rewards should be aligned in such a way, that nodes of all types that benefit the blockchain should be rewarded just like miners in Proof of Work.

There are currently niche attempts to solve this problem, one such attempt is the "Saito consensus mechanism". Rather than paying only miners, it pays all nodes that route transactions into the network. This incentivises new services to be deployed (= more nodes, further securing the network) and also solves other problems, such as the Infura Problem (The company Infura controlling 80+% of all Ethereum Nodes).

A new consensus algorithm would of course be a hard fork.

Answer 8

PS - I suppose it could be argued that having a wallet that is in my custody is the reciprocating value even though I currently own no bitcoin to put in it -) Peace.