BA-03 · LESSON 05

Incentive compatibility

KEY DEFINITIONS

Terms used in this lesson

Block subsidy: New bitcoin that consensus permits a block's coinbase transaction to create at a particular height.
BTC: The common market ticker for bitcoin.
Coinbase transaction: The special first transaction in a Bitcoin block, which claims permitted subsidy and fees and has no ordinary prior-output input.

Bitcoin participants do not all want the same thing. The system works when following valid rules usually pays better than attacking or accepting invalid history.

35 min Difficulty 1/5 Not started

VISUAL MODEL

See the whole mechanism before going step by step

Use the diagrams to orient yourself. Then the guided explanation below teaches every part in depth.

4 explanatory views

CONCEPT-SPECIFIC MAP · state machineOne valid action transforms a known stateSelect any state to inspect its exact role.

RELATIONSHIP MAPOrdered mechanism flow

01
BEFOREKnown state
Identify the facts and objects that exist before the action.
02
ACTIONIncentive compatibility
The Incentive compatibility lesson isolates the event that proposes a change.
03
RULEDeterministic check
The enforcing rule accepts or rejects the proposed transition.
04
AFTERSuccessor state
Accepted work creates a new state without silently changing the prior facts.
05
FAILUREState unchanged
A failed condition must not produce a partially accepted successor.

Rule shown: A valid transition names the prior state, action, enforcing rule, and successor state.

STAGE 1 OF 5BEFORE: Known state

Identify the facts and objects that exist before the action.

Governing relationship: A valid transition names the prior state, action, enforcing rule, and successor state. Complete path: 1. BEFORE, Known state. Identify the facts and objects that exist before the action. 2. ACTION, Incentive compatibility. The Incentive compatibility lesson isolates the event that proposes a change. 3. RULE, Deterministic check. The enforcing rule accepts or rejects the proposed transition. 4. AFTER, Successor state. Accepted work creates a new state without silently changing the prior facts. 5. FAILURE, State unchanged. A failed condition must not produce a partially accepted successor.

1. State transitionWhat exists, what changes, and what results

BEFORE

A miner considers claiming 1 BTC more than consensus permits in a block.

MECHANISM

A miner can include or censor transactions, a node can accept or reject a block, a user can choose software and counterparties, and a business can support particular assets o…

AFTER

The rule is enforced by validation, while economic loss gives miners a reason not to violate it.

Text equivalent: Starting from A miner considers claiming 1 BTC more than consensus permits in a block. The mechanism begins when A miner can include or censor transactions, a node can accept or reject a block, a user can choose software and counterparties, and a business can support particular assets or rules. The resulting lesson is The rule is enforced by validation, while economic loss gives miners a reason not to violate it.

2. Mechanism pathSelect a stage to inspect its job

STAGE 1 OF 5

List each participant's choices

A miner can include or censor transactions, a node can accept or reject a block, a user can choose software and counterparties, and a business can support particular assets or rules.

Complete path: 1. List each participant's choices: A miner can include or censor transactions, a node can accept or reject a block, a user can choose software and counterparties, and a business can support particular assets or rules. 2. Attach payoffs: Revenue, asset value, operating cost, legal exposure, reputation, and ideological goals affect which option a participant prefers. 3. Apply protocol constraints: A miner may create any candidate block, but nodes reject one that violates their consensus rules. Hash power cannot make an invalid subsidy valid to those nodes. 4. Model coordination: A technically valid change can still lack market acceptance or infrastructure support. Participants often care about what they expect others to adopt. 5. Check equilibrium and failure: An equilibrium is stable when unilateral deviation is less attractive. Concentration, external subsidies, censorship demands, or bugs can change the payoff structure.

3. Rule and failure boundaryWhat accepts the result and where it can stop

ACCEPTED PATH

Expected payoff includes accepted revenue, mining cost, outside payments, reputation, and the independent node-validity result.

CHANGED CONDITION

An invalid reward can be constructed but honest nodes reject it; reduced economic validation increases coordination pressure without changing their consensus rule.

Important distinction: Bitcoin is secure because every participant shares the same goals. Participants have conflicting goals. Security relies on verifiable constraints, costly deviations, and sufficiently distributed choices, not universal goodwill.

Text equivalent: The accepted path is enforced by Expected payoff includes accepted revenue, mining cost, outside payments, reputation, and the independent node-validity result. If the required condition changes, An invalid reward can be constructed but honest nodes reject it; reduced economic validation increases coordination pressure without changing their consensus rule.

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Learn the idea

Incentive compatibility means participants pursuing their own interests are encouraged to follow the intended rules. Bitcoin has users who value valid settlement, miners who earn subsidy and fees, node operators who choose validation software, developers who propose code, and businesses that provide markets and services. Their incentives overlap but are not identical.

GUIDED EXPLANATION1/5 ideas inspected

List each participant's choices

A miner can include or censor transactions, a node can accept or reject a block, a user can choose software and counterparties, and a business can support particular assets or rules.

The worked example follows the explanation

Inspect every idea above to open it.

Important distinction“Bitcoin is secure because every participant shares the same goals.”

Participants have conflicting goals. Security relies on verifiable constraints, costly deviations, and sufficiently distributed choices, not universal goodwill.

FINISH LEARNING FIRST

The questions unlock after every required learning activity

Inspect every guided idea, open the worked example, rebuild its mechanism, and complete the deterministic lesson tool. Your progress is saved automatically.