Validating Blocks

Site: Saylor Academy
Course: CS120: Bitcoin for Developers I
Book: Validating Blocks
Printed by: Guest user
Date: Monday, March 4, 2024, 3:30 AM

Description

Now, we'll switch gears a bit from mining to the larger process of consensus. Here, we'll cover validating new blocks, the validation process, and blockchain difficulties such as forks.

Validating a New Block

The third step in bitcoin's consensus mechanism is independent validation of each new block by every node on the network. As the newly solved block moves across the network, each node performs a series of tests to validate it before propagating it to its peers. This ensures that only valid blocks are propagated on the network. The independent validation also ensures that miners who act honestly get their blocks incorporated in the blockchain, thus earning the reward. Those miners who act dishonestly have their blocks rejected and not only lose the reward, but also waste the effort expended to find a Proof-of-Work solution, thus incurring the cost of electricity without compensation.

When a node receives a new block, it will validate the block by checking it against a long list of criteria that must all be met; otherwise, the block is rejected. These criteria can be seen in the Bitcoin Core client in the functions CheckBlock and CheckBlockHeader and include:

  • The block data structure is syntactically valid
  • The block header hash is equal to or less than the target (enforces the Proof-of-Work)
  • The block timestamp is less than two hours in the future (allowing for time errors)
  • The block size is within acceptable limits
  • The first transaction (and only the first) is a coinbase transaction
  • All transactions within the block are valid using the transaction checklist discussed in Independent Verification of Transactions

The independent validation of each new block by every node on the network ensures that the miners cannot cheat. In previous sections we saw how miners get to write a transaction that awards them the new bitcoin created within the block and claim the transaction fees. Why don't miners write themselves a transaction for a thousand bitcoin instead of the correct reward? Because every node validates blocks according to the same rules. An invalid coinbase transaction would make the entire block invalid, which would result in the block being rejected and, therefore, that transaction would never become part of the ledger. The miners have to construct a perfect block, based on the shared rules that all nodes follow, and mine it with a correct solution to the Proof-of-Work. To do so, they expend a lot of electricity in mining, and if they cheat, all the electricity and effort is wasted. This is why independent validation is a key component of decentralized consensus.


Source: Andreas M. Antonopoulos, https://github.com/bitcoinbook/bitcoinbook/blob/develop/ch10.asciidoc
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 License.

Assembling and Selecting Chains of Blocks

The final step in bitcoin's decentralized consensus mechanism is the assembly of blocks into chains and the selection of the chain with the most Proof-of-Work. Once a node has validated a new block, it will then attempt to assemble a chain by connecting the block to the existing blockchain.

Nodes maintain three sets of blocks: those connected to the main blockchain, those that form branches off the main blockchain (secondary chains), and finally, blocks that do not have a known parent in the known chains (orphans). Invalid blocks are rejected as soon as any one of the validation criteria fails and are therefore not included in any chain.

The "main chain" at any time is whichever valid chain of blocks has the most cumulative Proof-of-Work associated with it. Under most circumstances this is also the chain with the most blocks in it, unless there are two equal-length chains and one has more Proof-of-Work. The main chain will also have branches with blocks that are "siblings" to the blocks on the main chain. These blocks are valid but not part of the main chain. They are kept for future reference, in case one of those chains is extended to exceed the main chain in work. In the next section (Blockchain Forks), we will see how secondary chains occur as a result of an almost simultaneous mining of blocks at the same height.

When a new block is received, a node will try to slot it into the existing blockchain. The node will look at the block's "previous block hash" field, which is the reference to the block's parent. Then, the node will attempt to find that parent in the existing blockchain. Most of the time, the parent will be the "tip" of the main chain, meaning this new block extends the main chain. For example, the new block 277,316 has a reference to the hash of its parent block 277,315. Most nodes that receive 277,316 will already have block 277,315 as the tip of their main chain and will therefore link the new block and extend that chain.

Sometimes, as we will see in Blockchain Forks, the new block extends a chain that is not the main chain. In that case, the node will attach the new block to the secondary chain it extends and then compare the work of the secondary chain to the main chain. If the secondary chain has more cumulative work than the main chain, the node will reconverge on the secondary chain, meaning it will select the secondary chain as its new main chain, making the old main chain a secondary chain. If the node is a miner, it will now construct a block extending this new, longer, chain.

If a valid block is received and no parent is found in the existing chains, that block is considered an "orphan." Orphan blocks are saved in the orphan block pool where they will stay until their parent is received. Once the parent is received and linked into the existing chains, the orphan can be pulled out of the orphan pool and linked to the parent, making it part of a chain. Orphan blocks usually occur when two blocks that were mined within a short time of each other are received in reverse order (child before parent).

By selecting the greatest-cumulative-work valid chain, all nodes eventually achieve network-wide consensus. Temporary discrepancies between chains are resolved eventually as more work is added, extending one of the possible chains. Mining nodes "vote" with their mining power by choosing which chain to extend by mining the next block. When they mine a new block and extend the chain, the new block itself represents their vote.

In the next section we will look at how discrepancies between competing chains (forks) are resolved by the independent selection of the greatest-cumulative-work chain.

Blockchain Forks

Because the blockchain is a decentralized data structure, different copies of it are not always consistent. Blocks might arrive at different nodes at different times, causing the nodes to have different perspectives of the blockchain. To resolve this, each node always selects and attempts to extend the chain of blocks that represents the most Proof-of-Work, also known as the longest chain or greatest cumulative work chain. By summing the work recorded in each block in a chain, a node can calculate the total amount of work that has been expended to create that chain. As long as all nodes select the greatest-cumulative-work chain, the global bitcoin network eventually converges to a consistent state. Forks occur as temporary inconsistencies between versions of the blockchain, which are resolved by eventual reconvergence as more blocks are added to one of the forks.

Tip: The blockchain forks described in this section occur naturally (accidentally) as a result of transmission delays in the global network. Later in this chapter, we will also look at deliberately induced forks (hard forks and soft forks), which are used to modify the consensus rules.

In the next few diagrams, we follow the progress of a "fork" event across the network. The diagram is a simplified representation of the bitcoin network. For illustration purposes, different blocks are shown as different shapes (star, triangle, upside-down triangle, rhombus), spreading across the network. Each node in the network is represented as a circle.

Each node has its own perspective of the global blockchain. As each node receives blocks from its neighbors, it updates its own copy of the blockchain, selecting the greatest-cumulative-work chain. For illustration purposes, each node contains a shape that represents the block that it believes is currently the tip of the main chain. So, if you see a star shape in the node, that means that the star block is the tip of the main chain, as far as that node is concerned.

In the first diagram (Before the fork – all nodes have the same perspective), the network has a unified perspective of the blockchain, with the star block as the tip of the main chain.

Figure 2. Before the fork – all nodes have the same perspective

A "fork" occurs whenever there are two different valid blocks at the same block height competing to form the longest blockchain. This occurs under normal conditions whenever two miners solve the Proof-of-Work algorithm within a short period of time from each other. As both miners discover a solution for their respective candidate blocks, they immediately broadcast their own "winning" block to their immediate neighbors who begin propagating the block across the network. Each node that receives a valid block will incorporate it into its blockchain, extending the blockchain by one block. If that node later sees another valid block extending the same parent (at the same block height), it connects the second block on a secondary chain, forking its main chain. As a result, some nodes will "see" one winning block first, while other nodes will see the other winning block first, and two competing versions of the blockchain will emerge.

In Visualization of a blockchain fork event: two blocks found simultaneously, we see two miners (Node X and Node Y) who mine two different blocks almost simultaneously. Both of these blocks are children of the star block, and extend the chain by building on top of the star block. To help us track it, one is visualized as a triangle block originating from Node X, and the other is shown as an upside-down triangle block originating from Node Y.

Figure 3. Visualization of a blockchain fork event: two blocks found simultaneously

Let's assume, for example, that the miner Node X finds a Proof-of-Work solution for a block "triangle" that extends the blockchain, building on top of the parent block "star". Almost simultaneously, the miner Node Y who was also extending the chain from block "star" finds a solution for block "upside-down triangle," his candidate block. Now, there are two possible blocks; one we call "triangle," originating in Node X; and one we call "upside-down triangle," originating in Node Y. Both blocks were successfully mined, both blocks are valid (contain a valid solution to the Proof-of-Work), and both blocks extend the same parent (block "star"). Both blocks likely contain most of the same transactions, with only perhaps a few differences in the order of transactions.

As the two blocks propagate, some nodes receive block "triangle" first and some receive block "upside-down triangle" first. As shown in Visualization of a blockchain fork event: two blocks propagate, splitting the network, the network splits into two different perspectives of the blockchain; one side topped with the triangle block, the other with the upside-down-triangle block.

Figure 4. Visualization of a blockchain fork event: two blocks propagate, splitting the network

In Visualization of a blockchain fork event: two blocks propagate, splitting the network, the miner Node X mined (created) the triangle block and extended the star chain with it. Therefore, Node X initially considers the chain with "triangle" block as the main chain. Later, Node X also received the "upside-down triangle" block that was mined by Node Y. Since it was received second, it is assumed to have "lost" the race. Yet, the "upside-down triangle" block is not discarded. It is linked to the "star" block parent and forms a secondary chain. While Node X assumes its main chain is the winning chain, it keeps the "losing" chain so that it has the information needed to reconverge if the "losing" chain ends up "winning".

On the other side of the network, the miner Node Y constructs a blockchain based on its own perspective of the sequence of events. The miner Node Y mined (created) the "upside-down triangle" and initially considers that chain as the main chain (the "winner" chain). When it later received the "triangle" block that was mined by Node X, it connected it to the "star" block parent as a secondary chain.

Neither side is "correct," or "incorrect". Both are valid perspectives of the blockchain. Only in hindsight will one prevail, based on how these two competing chains are extended by additional work.

Each mining node whose perspective resembles Node X will immediately begin mining a candidate block that extends the chain with "triangle" as its tip. By linking "triangle" as the parent of their candidate blocks, they are voting with their hashing power. Their vote supports the chain that they have elected as the main chain.

Any mining node whose perspective resembles Node Y will start building a candidate block with "upside-down triangle" as its parent, extending the chain that they believe is the main chain. And so, the race begins again.

Forks are almost always resolved within one block time (10 minutes on average). While part of the network's hashing power is dedicated to building on top of "triangle" as the parent, another part of the hashing power is focused on building on top of "upside-down triangle". Even if the hashing power is almost evenly split, it is likely that one set of miners will find a solution and propagate it before the other set of miners have found any solutions. Let's say, for example, that the miners building on top of "triangle" find a new block "rhombus" that extends the chain (e.g., star-triangle-rhombus). They immediately propagate this new block and the entire network sees it as a valid solution as shown in Visualization of a blockchain fork event: a new block extends one fork, reconverging the network. Both Node X and Node Y now consider "upside-down-triangle" block as a stale block.

All nodes that had chosen "triangle" as the winner in the previous round will simply extend the chain one more block. The nodes that chose "upside-down triangle" as the winner, however, will now see two chains: star-triangle-rhombus and star-upside-down-triangle. The chain star-triangle-rhombus is now longer (more cumulative work) than the other chain. As a result, those nodes will set the chain star-triangle-rhombus as the main chain and change the star-upside-down-triangle chain to a secondary chain, as shown in Visualization of a blockchain fork event: the network reconverges on a new longest chain. This is a chain reconvergence, because those nodes are forced to revise their view of the blockchain to incorporate the new evidence of a longer chain. Any miners working on extending the chain star-upside-down-triangle will now stop that work because their candidate block is now considered a child of a stale block, as its parent "upside-down-triangle" is no longer on the longest chain. Since the upside-down-triangle block is now obsolete, the miner Node Y (which mined this block) will not be able to spend the mining reward for this block, even though this block was valid and was successfully mined. The transactions within "upside-down-triangle" that are not within "triangle" are re-inserted in the mempool for inclusion in the next block to become a part of the main chain. The entire network reconverges on a single blockchain star-triangle-rhombus, with "rhombus" as the last block in the chain. All miners immediately start working on candidate blocks that reference "rhombus" as their parent to extend the star-triangle-rhombus chain.

visualization of block chain event

Figure 5. Visualization of a blockchain fork event: a new block extends one fork, reconverging the network. Both Node X and Node Y now consider "upside-down-triangle" block as a stale block.

Figure 6. Visualization of a blockchain fork event: the network reconverges on a new longest chain

It is theoretically possible for a fork to extend to two blocks, if two blocks are found almost simultaneously by miners on opposite "sides" of a previous fork. However, the chance of that happening is very low. Whereas a one-block fork might occur every day, a two-block fork occurs at most once every few weeks.

Bitcoin's block interval of 10 minutes is a design compromise between fast confirmation times (settlement of transactions) and the probability of a fork. A faster block time would make transactions clear faster but lead to more frequent blockchain forks, whereas a slower block time would decrease the number of forks but make settlement slower.

Mining and the Hashing Race

Bitcoin mining is an extremely competitive industry. The hashing power has increased exponentially every year of bitcoin's existence. Some years the growth has reflected a complete change of technology, such as in 2010 and 2011 when many miners switched from using CPU mining to GPU mining and field programmable gate array (FPGA) mining. In 2013 the introduction of ASIC mining lead to another giant leap in mining power, by placing the SHA256 function directly on silicon chips specialized for the purpose of mining. The first such chips could deliver more mining power in a single box than the entire bitcoin network in 2010.

The following list shows the total hashing power of the bitcoin network in terahashes/sec (TH/sec), since its inception in 2009 (source: Blockchain.com):

2009

0.000004 – 0.00001 TH/sec (2.40× growth)

2010

0.00001 – 0.14 TH/sec (14,247× growth)

2011

0.14 – 9.49 TH/sec (63.92× growth)

2012

9.49 – 22 TH/sec (2.32× growth)

2013

22.04 – 15,942 TH/sec (723.32× growth)

2014

15,942 – 306,333 TH/sec (19.21× growth)

2015

306,333 – 881,232 TH/sec (2.87× growth)

2016

881,232 – 2,807,540 TH/sec (3.18× growth)

2017

2,807,540 – 18,206,558 TH/sec (6.48× growth)

2018

18,206,558 – 41,801,528 TH/sec (2.29× growth)

2019

41,801,528 – 109,757,127 TH/sec (2.62× growth)

2020

109,757,127 – 149,064,869 TH/sec (1.35× growth)

In the chart in Total hashing power, terahashes per second (TH/sec) (chart on a linear scale), we can see that bitcoin network's hashing power increased over the past two years. As you can see, the competition between miners and the growth of bitcoin has resulted in an exponential increase in the hashing power (total hashes per second across the network).

Figure 7. Total hashing power, terahashes per second (TH/sec) (chart on a linear scale)

As the amount of hashing power applied to mining bitcoin has exploded, the difficulty has risen to match it. The difficulty metric in the chart shown in Bitcoin's mining difficulty metric (chart on a logarithmic scale) is measured as a ratio of current difficulty over minimum difficulty (the difficulty of the first block).

Figure 8. Bitcoin's mining difficulty metric (chart on a logarithmic scale)

In the last two years, the ASIC mining chips have become increasingly denser, approaching the cutting edge of silicon fabrication with a feature size (resolution) of 7 nanometers (nm). Currently, ASIC manufacturers are aiming to overtake general-purpose CPU chip manufacturers, designing chips with a feature size of 5 nm, because the profitability of mining is driving this industry even faster than general computing. There are no more giant leaps left in bitcoin mining, because the industry has reached the forefront of Moore's Law, which stipulates that computing density will double approximately every 18 months. Still, the mining power of the network continues to advance at an exponential pace as the race for higher density chips is matched with a race for higher density data centers where thousands of these chips can be deployed. It's no longer about how much mining can be done with one chip, but how many chips can be squeezed into a building, while still dissipating the heat and providing adequate power.

The Extra Nonce Solution

Since 2012, bitcoin mining has evolved to resolve a fundamental limitation in the structure of the block header. In the early days of bitcoin, a miner could find a block by iterating through the nonce until the resulting hash was equal to or below the target. As difficulty increased, miners often cycled through all 4 billion values of the nonce without finding a block. However, this was easily resolved by updating the block timestamp to account for the elapsed time. Because the timestamp is part of the header, the change would allow miners to iterate through the values of the nonce again with different results. Once mining hardware exceeded 4 GH/sec, however, this approach became increasingly difficult because the nonce values were exhausted in less than a second. As ASIC mining equipment started pushing and then exceeding the TH/sec hash rate, the mining software needed more space for nonce values in order to find valid blocks. The timestamp could be stretched a bit, but moving it too far into the future would cause the block to become invalid. A new source of "change" was needed in the block header. The solution was to use the coinbase transaction as a source of extra nonce values. Because the coinbase script can store between 2 and 100 bytes of data, miners started using that space as extra nonce space, allowing them to explore a much larger range of block header values to find valid blocks. The coinbase transaction is included in the merkle tree, which means that any change in the coinbase script causes the merkle root to change. Eight bytes of extra nonce, plus the 4 bytes of "standard" nonce allow miners to explore a total 296 (8 followed by 28 zeros) possibilities per second without having to modify the timestamp. If, in the future, miners could run through all these possibilities, they could then modify the timestamp. There is also more space in the coinbase script for future expansion of the extra nonce space.

Mining Pools

In this highly competitive environment, individual miners working alone (also known as solo miners) don't stand a chance. The likelihood of them finding a block to offset their electricity and hardware costs is so low that it represents a gamble, like playing the lottery. Even the fastest consumer ASIC mining system cannot keep up with commercial systems that stack tens of thousands of these chips in giant warehouses near hydroelectric powerstations. Miners now collaborate to form mining pools, pooling their hashing power and sharing the reward among thousands of participants. By participating in a pool, miners get a smaller share of the overall reward, but typically get rewarded every day, reducing uncertainty.

Let's look at a specific example. Assume a miner has purchased mining hardware with a combined hashing rate of 14,000 gigahashes per second (GH/s), or 14 TH/s. In 2017 this equipment costs approximately $2,500 USD. The hardware consumes 1375 watts (1.3 kW) of electricity when running, 33 kW-hours a day, at a cost of $1 to $2 per day at very low electricity rates. At current bitcoin difficulty, the miner will be able to solo mine a block approximately once every 4 years. How do we work out that probability? It is based on a network-wide hashing rate of 3 EH/sec (in 2017), and the miner's rate of 14 TH/sec:

  • P = (14 * 10^{12} / 3 * 10^{18}) * 210240 = 0.98

…​where 210240 is the number of blocks in four years. The miner has a 98% probability of finding a block over four years, based on the global hash rate at the beginning of the period.

If the miner does find a single block in that timeframe, the payout of 6.25 bitcoin, at approximately $1,000 per bitcoin, will result in a single payout of $6,250, which will produce a net profit of about $750. However, the chance of finding a block in a 4-year period depends on the miner's luck. He might find two blocks in 4 years and make a larger profit. Or he might not find a block for 5 years and suffer a big financial loss. Even worse, the difficulty of the bitcoin Proof-of-Work algorithm is likely to go up significantly over that period, at the current rate of growth of hashing power, meaning the miner has, at most, one year to break even before the hardware is effectively obsolete and must be replaced by more powerful mining hardware. Financially this only makes sense at very low electricity cost (less than 1 cent per kW-hour) and only at very large scale.

Mining pools coordinate many hundreds or thousands of miners, over specialized pool-mining protocols. The individual miners configure their mining equipment to connect to a pool server, and specify a bitcoin address, which will receive their share of the rewards. Their mining hardware remains connected to the pool server while mining, synchronizing their efforts with the other miners. Thus, the pool miners share the effort to mine a block and then share in the rewards.

Successful blocks pay the reward to a pool bitcoin address, rather than individual miners. The pool server will periodically make payments to the miners' bitcoin addresses, once their share of the rewards has reached a certain threshold. Typically, the pool server charges a percentage fee of the rewards for providing the pool-mining service.

Miners participating in a pool split the work of searching for a solution to a candidate block, earning "shares" for their mining contribution. The mining pool sets a higher target (lower difficulty) for earning a share, typically more than 1,000 times easier than the bitcoin network's target. When someone in the pool successfully mines a block, the reward is earned by the pool and then shared with all miners in proportion to the number of shares they contributed to the effort.

Pools are open to any miner, big or small, professional or amateur. A pool will therefore have some participants with a single small mining machine, and others with a garage full of high-end mining hardware. Some will be mining with a few tens of a kilowatt of electricity, others will be running a data center consuming a megawatt of power. How does a mining pool measure the individual contributions, so as to fairly distribute the rewards, without the possibility of cheating? The answer is to use bitcoin's Proof-of-Work algorithm to measure each pool miner's contribution, but set at a lower difficulty so that even the smallest pool miners win a share frequently enough to make it worthwhile to contribute to the pool. By setting a lower difficulty for earning shares, the pool measures the amount of work done by each miner. Each time a pool miner finds a block header hash that is equal to or less than the pool target, she proves she has done the hashing work to find that result. More importantly, the work to find shares contributes, in a statistically measurable way, to the overall effort to find a hash equal to or lower than the bitcoin network's target. Thousands of miners trying to find low-value hashes will eventually find one low enough to satisfy the bitcoin network target.

Let's return to the analogy of a dice game. If the dice players are throwing dice with a goal of throwing equal to or less than four (the overall network difficulty), a pool would set an easier target, counting how many times the pool players managed to throw equal to or less than eight. When pool players throw equal to or less than eight (the pool share target) but higher than four (higher than the overall network difficulty), they earn shares, but neither they nor the pool win the game because they don't achieve the game target (equal to or less than four). The pool players will achieve the easier pool target much more often, earning them shares very regularly, even when they don't achieve the harder target of winning the game. Every now and then, one of the pool players will throw a combined dice throw of equal to or less than four, the pool player wins a share and the whole pool wins the game. Then, the earnings can be distributed to the pool players based on the amount of shares each one has earned. Even though the target of eight-or-less wasn't winning, it was a fair way to measure dice throws for the players, and it occasionally produces a four-or-less throw.

Similarly, a mining pool will set a (higher and easier) pool target that will ensure that an individual pool miner can find block header hashes that are equal to or less than the pool target often, earning shares. Every now and then, one of these attempts will produce a block header hash that is equal to or less than the bitcoin network target, making it a valid block and the whole pool wins.

Managed pools

Most mining pools are "managed," meaning that there is a company or individual running a pool server. The owner of the pool server is called the pool operator, and he charges pool miners a percentage fee of the earnings.

The pool server runs specialized software and a pool-mining protocol that coordinate the activities of the pool miners. The pool server is also connected to one or more full bitcoin nodes and has direct access to a full copy of the blockchain database. This allows the pool server to validate blocks and transactions on behalf of the pool miners, relieving them of the burden of running a full node. For pool miners, this is an important consideration, because a full node requires a dedicated computer with at least 300 to 350 GB of persistent storage (disk) and at least 2 to 4 GB of memory (RAM). Furthermore, the bitcoin software running on the full node needs to be monitored, maintained, and upgraded frequently. Any downtime caused by a lack of maintenance or lack of resources will hurt the miner's profitability. For many miners, the ability to mine without running a full node is another big benefit of joining a managed pool.

Pool miners connect to the pool server using a mining protocol such as Stratum (STM) or GetBlockTemplate (GBT). An older standard called GetWork (GWK) has been mostly obsolete since late 2012, because it does not easily support mining at hash rates above 4 GH/s. Both the STM and GBT protocols create block templates that contain a template of a candidate block header. The pool server constructs a candidate block by aggregating transactions, adding a coinbase transaction (with extra nonce space), calculating the merkle root, and linking to the previous block hash. The header of the candidate block is then sent to each of the pool miners as a template. Each pool miner then mines using the block template, at a higher (easier) target than the bitcoin network target, and sends any successful results back to the pool server to earn shares.

Peer-to-peer mining pool (P2Pool)

Managed pools create the possibility of cheating by the pool operator, who might direct the pool effort to double-spend transactions or invalidate blocks. Furthermore, centralized pool servers represent a single-point-of-failure. If the pool server is down or is slowed by a denial-of-service attack, the pool miners cannot mine. In 2011, to resolve these issues of centralization, a new pool mining method was proposed and implemented: P2Pool, a peer-to-peer mining pool without a central operator.

P2Pool works by decentralizing the functions of the pool server, implementing a parallel blockchain-like system called a share chain. A share chain is a blockchain running at a lower difficulty than the bitcoin blockchain. The share chain allows pool miners to collaborate in a decentralized pool by mining shares on the share chain at a rate of one share block every 30 seconds. Each of the blocks on the share chain records a proportionate share reward for the pool miners who contribute work, carrying the shares forward from the previous share block. When one of the share blocks also achieves the bitcoin network target, it is propagated and included on the bitcoin blockchain, rewarding all the pool miners who contributed to all the shares that preceded the winning share block. Essentially, instead of a pool server keeping track of pool miner shares and rewards, the share chain allows all pool miners to keep track of all shares using a decentralized consensus mechanism like bitcoin's blockchain consensus mechanism.

P2Pool mining is more complex than pool mining because it requires that the pool miners run a dedicated computer with enough disk space, memory, and internet bandwidth to support a full bitcoin node and the P2Pool node software. P2Pool miners connect their mining hardware to their local P2Pool node, which simulates the functions of a pool server by sending block templates to the mining hardware. On P2Pool, individual pool miners construct their own candidate blocks, aggregating transactions much like solo miners, but then mine collaboratively on the share chain. P2Pool is a hybrid approach that has the advantage of much more granular payouts than solo mining, but without giving too much control to a pool operator like managed pools.

Even though P2Pool reduces the concentration of power by mining pool operators, it is conceivably vulnerable to 51% attacks against the share chain itself. A much broader adoption of P2Pool does not solve the 51% attack problem for bitcoin itself. Rather, P2Pool makes bitcoin more robust overall, as part of a diversified mining ecosystem.