How Bitcoin ecosystem works

Bitcoin is an open source software project, with most node operators and miners that secure the network relying on Bitcoin Core. As of March 2023 there are currently five volunteer Bitcoin Core maintainers on Github, in addition to hundreds of contributors, although more may be added to uphold the network’s diversity. The goal is for bitcoin’s financial network to never have any single source of control, which would create a central point of failure. The way the bitcoin community avoids this is having many organizations fund grants and publish open source code to foster redundancy, and independent contributions based on their technical merit.

The most important stakeholders in the decentralized bitcoin ecosystem include node operators, who distribute blockchain data, bitcoin miners, who confirm bitcoin transactions in exchange for a block subsidy plus transaction fees, bitcoin tool and product developers, and of course, bitcoin users.

Nodes

A bitcoin node supports the network by validating transactions spreading them to other nodes. Thousands of people and organizations around the world run their own independent nodes. Some people download node software on their own laptops, while others build node devices using a Raspberry Pi. Some companies run nodes with industrial hardware, too. In any form, the node is what gives any bitcoin user his or her own full copy of the blockchain, rather than relying on other people’s hardware to keep track of the public ledger. The public ledger is what makes the bitcoin network permissionless. Anyone with an internet connection can view a complete record of bitcoin transactions and verify transaction information, as well as the supply of bitcoin that currently exists.

Miners

Bitcoin miners run hardware devices that finalize transactions by guessing random numbers, and whichever miner guesses the correct number gets to create the next block. Imagine, metaphorically, these miner devices are filling the blocks in the proverbial blockchain. Bitcoin miners around the world, including hundreds of industrial mining operations, create a new block for the Bitcoin network roughly once every ten minutes.

Theoretically speaking, miners could influence Bitcoin Core code by rejecting transactions with a particular update. This would, by default, mean that node operators would have a harder time finding that broadcast data. Whatever the majority of nodes broadcast, that is the current state of the Bitcoin blockchain. Bitcoin Core code maintainers would most likely follow the majority in such a case. So far in bitcoin’s 15-year history, such conflicts have been resolved through community consensus. There is a historic update called Taproot, which we’ll explore later in greater detail, where it was unknown whether the diverse companies involved with bitcoin mining would accept updated information and formalize it as part of the network.

Luckily, all bitcoin miners, for their own independent reasons, have thus far found it advantageous to incorporate all network updates with popular consensus. Much like the way courts and legislators provide a system of checks and balances in governments, bitcoin miners, node operators, and developers work together as a type of checks and balances in the bitcoin ecosystem.

A wide variety of bitcoin companies, from exchange companies like BitMex to wallet producers like Jack Dorsey’s charitable Square spinoff, Spiral, sponsor grants for independent, open source developers to maintain Bitcoin Core code and other like-minded software projects. A few companies keep open source contributors on staff, as Blockstream and Coinbase have in the past. However, most open source bitcoin software developers, including toolmakers like wallet creators, earn grants and accept community donations for independent work. This helps keep the bitcoin network out of the control of any one company or developer group. There are developer organizations, like the nonprofit Brink and the research institute Chaincode Labs. As became evident in the Taproot upgrade we’ll explore shortly, these organizations can only influence public opinion about Bitcoin Improvement Proposals, called BIPs. The bitcoin developer ecosystem, with hundreds of active contributors, gets funding and contributions from so many different people that there is no single entity that could force a change. This is only possible because all of the code related to crucial Bitcoin network functions is already widely broadcasted and freely available from many different sources, and each node operator has a choice in which version of the code they will use.

Let’s take a look at one example of how bitcoin’s open source development process works. On November 14, 2021, the Bitcoin network got its first major makeover since the SegWit (segregated witness) fork in 2017, first introduced by developer Pieter Wuille in 2015. As you can already tell from these dates alone, getting consensus with an open source developer community takes years of work.

In August 2017, an upgrade called Segregated Witness increased Bitcoin’s transaction throughput capacity within a given block by giving a discount to certain data used in transactions. In short, the SegWit upgrade allowed bitcoin miners to process more transactions with each block. Similarly to SegWit, Taproot was also a soft fork upgrade, meaning network participants that do not install it right away will not be cut off from the network. This makes it easier for different players across the industry to ease into the transition. The alternative to a soft fork is a hard fork, which results in participants being cut off from the network if they don’t upgrade.

Taproot’s predecessor, SegWit, inspired a contentious debate about whether a soft fork was the best approach. This debate resulted in an entirely new cryptocurrency called Bitcoin Cash which was created with a hard fork.

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