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Over the past decade, Bitcoin has experienced unparalleled growth, having been in circulation for fifteen years as both the network and the crypto. Most enthusiasts are unaware that the trillion-dollar asset was initially made available to the public through a PDF document. “Bitcoin: A Peer-to-Peer Electronic Cash System,” which was published on October 31, 2008, was developed as a response to the worldwide financial crisis by offering a completely decentralized and incorruptible supply-capped monetary system.
This paper, which is referred to as the “Bitcoin Whitepaper,” established the framework for modern crypto. The document was produced under the alias “Satoshi Nakamoto” and makes use of mathematical ideas that go back to 1957. The true identity of the creator or creators remains unknown to date.
This blog post will provide you with a summary of the most significant information found in the Bitcoin Whitepaper, simplifying it to the essential details that will help them grasp the motivations for the creation of Bitcoin and the goals their developer(s) set out to achieve.
Content of the Bitcoin Whitepaper, in a Nutshell
- Introduction
In the introduction, Satoshi Nakamoto presented the idea of a peer-to-peer electronic cash system. The key problem he aimed to solve was the double-spending issue, where a digital token could be spent more than once. Traditional electronic payment systems rely on a trusted central authority to prevent this, but Nakamoto proposed a system that would eliminate the need for such intermediaries.
- Transactions
Nakamoto explained that a Bitcoin transaction is a transfer of ownership of digital coins. Transactions are recorded on the blockchain, which is a public ledger. They include inputs (sources of funds) and outputs (recipient addresses), ensuring each coin can be traced back to its creation.
- Timestamp Server
The Bitcoin network employs a timestamp server to order transactions. This ensures that transactions are added to the blockchain in chronological order, maintaining the ledger’s integrity. It prevents issues like double-spending by confirming that transactions occur in a specific sequence.
- Proof-of-Work
Nakamoto introduced the concept of Proof-of-Work (PoW) as a consensus mechanism. Miners solve complex cryptographic puzzles by expending computational power. This process secures the network and validates transactions. PoW is also used to determine which miner gets the right to add a new block to the blockchain.
- Network
The Bitcoin network is decentralized and operates on a peer-to-peer basis. Participants, called nodes, communicate directly with each other. Each node stores a copy of the blockchain, and they work together to validate transactions and maintain the network’s security.
- Incentive
To encourage miners to participate in securing the network, Nakamoto introduced the concept of a block reward. Miners who successfully add a fresh block to the blockchain receive a reward in the form of newly created Bitcoins and transaction fees paid by users. This economic incentive drives the network’s security and integrity.
- Reclaiming Disk Space
Nakamoto discussed the need to optimize disk space by allowing users to prune unnecessary transaction data. This means users can choose only to store essential information, reducing the space required to run a full node.
- Simplified Payment Verification (SPV)
For lightweight clients, Nakamoto introduced Simplified Payment Verification (SPV). SPV nodes verify transactions without downloading the entire blockchain. Instead, they only download block headers, enabling faster transaction verification while relying on full nodes for security.
- Combining and Splitting Value
Nakamoto explained that Bitcoin allows users to combine and split transaction outputs, enabling more flexibility in payment options. This allows users to create transactions with different values and destinations.
- Privacy
While Bitcoin transactions are pseudonymous, Nakamoto suggested methods to enhance privacy. Users can improve their privacy by using multiple addresses, not reusing addresses, and following best practices, such as using CoinJoin for transaction mixing.
- Calculations
Throughout the Whitepaper, Nakamoto included mathematical calculations to support the concepts discussed. These calculations provided evidence of the security and reliability of the Bitcoin system.
- Conclusion
In the conclusion, Nakamoto summarized the key aspects of the Bitcoin system, emphasizing its potential to revolutionize the financial world. He highlighted the elimination of the need for trusted intermediaries and the creation of a decentralized, secure, and efficient peer-to-peer electronic cash system.
So, this was a quick overview of the Bitcoin Whitepaper. However, diving deep into it can be a little too technical, so we have tried to answer the following questions based on the Whitepaper for your better understanding. Let’s check them out!
Need for Bitcoin
Bitcoin was created out of a need to make digital payments on a peer-to-peer basis without the presence of a regulator to facilitate the transaction. This would be an easy job if the payer and payee were trusted parties. The banks and the government act as the trusted parties for all legally recognized modes of digital payments at present.
What is Bitcoin?
The term ‘blockchain’ is used wherever someone attempts to explain Bitcoin. The ‘chain’ here is a chain of electronic signatures that comprise a single unit of the electronic coin – Bitcoin.
How does a Bitcoin transaction take place?
In a typical transaction, the payer transfers the coin to the payee. The payer attaches his digital signature to the ‘hash’ of the transaction, and the payee attaches his public signature to this at the end of the coin. Any transaction can be verified by verifying the chain of signatures attached to the coin. It is similar to the physical transmission of bills of exchange – by signing the name of the next owner at the back of the bill.
How are the Bitcoin transactions verified?
A party to the blockchain will verify the transaction using CPU power – the CPU will be used to compute whether a transaction, when hashed, returns a value that begins with the required number of ‘zero bits.’ The hash will need to have the required number of ‘zero bits’ if it has to pose as a Bitcoin transaction. Such verification is called ‘Proof-of-Work (PoW).’ This cryptographic Proof-of-Work is a substitute for a trusted party in the digital transaction.
How are the transactions ‘tamper-proof’?
The peer-to-peer distributed ledger ensures that all participants maintain a complete record of all transactions. Nodes in the network can join and leave at will. However, the ledger’s authenticity is determined by the longest chain with the most invested Proof-of-Work. This means that if the majority of CPUs contribute their computing power to a particular chain, that chain is considered the valid one. Proof-of-Work is akin to votes in a democracy, with each CPU representing one vote. Therefore, as long as most “honest nodes” control most CPU power, the blockchain remains tamper-resistant. Even if an attacking node attempts to manipulate a block or transaction, it would need to resolve the targeted block and all subsequent blocks, which is computationally infeasible.
The chain of transactions forms a structure resembling a Merkle tree, with each block featuring its header, the hash of the previous transaction, and the corresponding nonce. To simplify transaction verification, users can check if the Merkle branch containing their transaction has been accepted into the network at any point. While this method is effective in most cases, it’s not foolproof. As a result, the Whitepaper also suggests that businesses heavily involved in Bitcoin transactions should run their network node, allowing them to download the entire blockchain for complete confidence in transaction authenticity.
How is the chronological order of transactions maintained?
The Proof-of-Work, as explained above, is implemented by implementing what is called a ‘nonce.’ Once the block is verified, a nonce is added to it until it gives the required number of ‘zero bits,’ and it is only after this that the next block can be chained to it. This ensures that ‘double-spending’ does not happen, i.e., making payments at two or more points with the same currency (paying more than what you actually hold). One can imagine it to be similar to making a payment with the same ₹100 currency note twice. Of course, this is impossible in the physical world, but it is quite possible in the virtual world if it weren’t for a Proof-of-Work system.
How does the block start?
There is no central regulatory authority to distribute the currency and bring it into circulation. The first block will then have to be a special transaction that brings the block into existence. This transaction is called ‘mining’. The incentive for mining is that the amount of electricity, CPU, and other resources spent in ‘mining’ the block will be lesser than the value gained in the output transaction when the coin is transferred. The difference between output value and resources spent in mining the coin will be the incentive for the miner. Another incentive could be transaction fees, where the incentive is added to the block containing the transaction.
What if a person has gathered enough CPU power than all the ‘honest’ nodes?
While he will theoretically be in a position to manipulate the transactions, he will be faced with two choices:
Choice 1: Use the CPU power to defraud people and steal Bitcoins, OR
Choice 2: Use the CPU power to generate more coins.
The Whitepaper illustrates that it will always be more profitable for such a person to use the CPU power and be an ‘honest’ node rather than an ‘attacker’ node since it has more incentive.
Other notable points
The Whitepaper also explains how a shortened ‘chain’ can be stored, how the coin’s value can be split or combined, how the information in a chain can be trimmed to use less memory space, and some recommendations regarding maintaining privacy while making such transactions. It also provides calculations to prove that the probability of an ‘attacker’ node catching up with an ‘honest’ node to manipulate transactions is exponentially low. It is emphasized that the simplicity of the network is what makes it such a robust system of payments.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
