The Bitcoin whitepaper - Summary

Bitcoin: A Peer-to-Peer Electronic Cash System, was published in 2008 by Satoshi Nakamoto. Delivered the first client in 2009 through Sourceforge. Satoshi handed development to Gavin Andresen in 2010 and at the time of writing bitcoin is maintained by 500+ contributors.The bitcoin white paper is 9 pages long and consists of an abstract and 12 sections.

WHO IS SATOSHI NAKAMOTO…?

The true identity of the creator of Bitcoin is one of the biggest mysteries in the modern world. Over the years many theories have popped up about who Satoshi Nakamoto really is, including a time traveler, a space alien, a rogue artificial intelligence or a front for groups such as the NSA & CIA .
In short Nobody really knows who satoshi is ?

we don’t even know its a single person or a group of people called satoshi. While satoshi’s identify is mystery and intresting , Its the idea of BTC is revolutionary.

Abstract :-

The paper begins with a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Breakdown: The first line of the abstract defines the problem that Satoshi hoped to solve. As the e-commerce era flourished, various commentators had speculated about how we could achieve electronic “cash”: a digital asset that could be exchanged directly from one person to another, just like a dollar bill, without needing to pass through an intermediary like a bank.

We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

In a nutshell, here is the key problem and a sketch of the solution.

The thing about electronic cash is that digital files are easy to copy. If you send me an MP3 online, you still keep the original file. Clearly this is incompatible with a store of financial value. if you can keep duplicating it, it’s worthless. Hence, the “double-spending problem.”

Generally this is solved by an intermediary like PayPal or VISA to keep track of who owns what, making sure that if you send me $10, that money is no longer in your account. To eliminate the need for this intermediary, transactions have to be broadcast across a peer-to-peer network as a public record, which collectively contains the details of each transaction sent and received.

1.INTRODUCTION :-

Satoshi speaks about the inefficiencies of commerce on the internet:

Peer-to-peer payments over an online network.

The Non-reversible transactions which in turn.Increase transaction costs and further accentuate the need for trusted and centralised third parties and An acceptance that some fraud is inevitable.

The need for a electronic payment system that uses cryptographic proof rather than trust. Enables parties to transaction directly with one another bypassing any central or trusted third party and Protects individuals from fraud

2. Transactions :-

In this section, Nakamoto’s description of the electronic transaction process, namely the blockchain, gets technical. In simple terms, he defines an electronic “coin” as a chain of digital signatures. Owners digitally sign a hash of the previous transaction and add a public key of the next owner to the end of the coin. A recipient of the coin, a payee, can verify the signatures in order to verify the chain of ownership.

A Bitcoin doesn’t exist anywhere per se, at least not in the traditional sense of physical cash. Rather, Nakamoto’s concept of an electronic “coin” is a chronological series of verified digital signatures. To illustrate, think of Nakamoto’s virtual coin as a UPS or FedEx package that you sign at your doorstep before sending it to a forwarding address. But the difference is that a publicly-available ledger is placed right on the packing slip which shows the entire history of all prior deliveries of the same package. The information includes all originating addresses as well as timestamps detailing where and when exactly each delivery took place. Such a comprehensive audit trail, he argues, would provide assurance to both recipient and the entire network that the chain of deliveries/transactions is accurate and secure.

However, Nakamoto points out a potential problem with duplicate payments. A recipient/payee can’t verify that a coin’s owner didn’t send the same coin to other recipients/payees, which is referred to as the double-spend problem.

For example, Ram owns only one Bitcoin but sends one coin each to two different merchants , amounting to two Bitcoins paid with only one originating coin. To solve the double-spend problem without relying on a third party, Nakamoto says that all transactions must be publicly revealed. Secondly, all participants of the payment system must add here to the same timeline so that everyone agrees to a single history of the order in which transactions are received.

3 . TIMESTAMP :-

A timestamp server takes a hash of a block of items and publicly announces the hash. The timestamp proves the existence of the data at the time. Each timestamp includes the previous timestamp in its hash. And each additional timestamp reinforces the ones before it. This sequence forms a chain.

Here we see the emerging structure of the blockchain. The timestamps are key to preventing double-spending and fraud. It’d be virtually impossible to send duplicate coins because each coin contains different, chronologically-ordered timestamps. Think back to the analogy of a FedEx package. Each delivery would contain a unique timestamp on the packing slip, and that would mark the exact time of each and every delivery on the public ledger. Bitcoin’s file size in bytes increases as the transaction history gets larger. And larger files lead to longer processing times. Transaction processing or mining continually require more CPU power to verify the transactions because the digital records themselves grow in size. Continuing our example, the packing slip on the same FedEx package keeps growing in size because more deliveries mean more recorded history of all deliveries ever made.

4. Proof-of-Work :-

To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back’s Hashcash… The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash.

Transactions need to be confirmed by the network so everyone can agree on their validity, and no reversing is possible. To do this, data about bitcoin transactions are grouped together into blocks, which form the input to the hashing algorithm. Computers in the network then add a section of junk text to the data until they find a hash value — that long string of numbers and letters — that begins with a certain number of zeroes. This takes a huge number of guesses, but after the hash has has been found, it’s easy for anyone with the input data to check that it is correct.

Once the CPU effort has been expended to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.

Here it is: the founding principle of the almighty blockchain.

Part of the input data for each block is a reference to the data in the block that came before. Since a hash algorithm gives a different output if any part of the input data is changed, if you want to alter the transactions in a past block, you then need to recalculate the hash value of every block that came after it, since the first change would alter the data in each successive block. The older the block, the more computing power would be needed to do this, and the less feasible it becomes to change the record.

5.NETWORK :-

In order to run a network, the following process repeats:

• New transactions must be transmitted to all nodes.

• Each node gathers each transaction into a block.

• Each node works on a proof-of-work process for each block, Once the node finds a proof-of-work, this is broadcast to all nodes in the network.

• Nodes accept the block if all the transactions within it are valid and not already spent.

• Nodes “approve” the block by working on the next block in the chain, using the hash of the approved block as the previous hash from which they can then build the next block , As a result nodes continue to work on the longest chain, which is always the correct one.

6. INCENTIVES :-

The goal in the peer to peer electronic cash system is to encourage nodes to connect to the network and validate transactions and The first block in a transaction starts a new coin which is owned by the creator of the block. In order to generate new blocks, and therefore coins (value), CPU and electricity are needed.

If the output of a transaction is less than the input value, a transaction fee is added to the block containing the transaction.

Mining gold requires labor, water and equipment and it’s an activity similar to Bitcoin mining. The miners of electronic coins process transactions, for which they are rewarded with new Bitcoins and/or transaction fees. Since a maximum of 21 million Bitcoins will ever be mined, the system can be free of inflation. Therefore, Bitcoin can serve as a sustainable store of value, similar to gold

7. Reclaiming Disk Space :-

Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the block’s hash, transactions are hashed in a Merkle Tree, with only the root included in the block’s hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do not need to be stored.

Here’s one of the few parts of the white paper that has not been implemented. The fact that it isn’t used is a reminder that the bitcoin white paper was just one person’s theoretical framework: It took a team of developers to write the software that would make bitcoin a reality, and changes were made along the way.

8. Simplified Payment Verification :-

In this section, Nakamoto provides a technical explanation of how to verify payments without running a full network node. That requires getting the longest proof-of-work chain and checking if the network has accepted it. The verification is reliable as long as honest nodes control the network. But an attacker can create fraudulent transactions for as long as an attacker can overpower the network. One defense against an attack is for network nodes to broadcast alerts when they detect an invalid block. Such an alert could prompt a user’s software to download the full block as well as alerted transactions in order to confirm the inconsistency. Nakamoto adds that businesses that receive frequent payments may want to consider operating their own nodes to achieve more independent security and quicker verification.

9. Combining and Splitting Value :-

Although it would be possible to handle coins individually, it would be unwieldy to make a separate transaction for every cent in a transfer. To allow value to be split and combined, transactions contain multiple inputs and outputs. Normally there will be either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and at most two outputs: one for the payment, and one returning the change, if any, back to the sender.

This part is tricky to grasp. To make up the exact sum of bitcoin transaction, there are two options: either a higher value chunk of bitcoin in your wallet is broken in two, or smaller chunks are combined to make a higher amount, with some change left over.

In a sense it’s like buying something with cash in a store: if you want to buy $13 of groceries, you might give the clerk $10 and three single bills to make the total, or you might hand over a $20 bill and get $7 change. The difference with bitcoin is that your change is always lumped in a single amount, as if it were a $7 bill. So if your regular wallet was like a bitcoin wallet, it would be filled with notes of irregular values — $2.65, $51.03, $0.02, and so on — and you’d have to combine these to buy something, receiving another irregular sum of money in change.

10.PRIVACY :-

Traditional banking limits access to information to just those involved in the transaction and the trusted third party. This is not workable in a model where the transactions are broadcast publicly, but the need for privacy is still important. Privacy is maintained by keeping public keys anonymous. A transfer can happen without knowing who is involved in the transaction.

11. CALCULATIONS :-

Calculations is the longest section in the whitepaper, just over 2 of the 9 pages. In this section the paper considers a scenario where bad actors in the system try to generate an alternative chain faster than the honest chain.

In this scenario there is a race between the honest chain and an attacker (bad) chain, and the section steps through the mathematical probability that the attacker chain can catch up with the honest chain.

In short, the section highlights mathematically that the odds are against the attacker chain unless he/she gets lucky!

12. CONCLUSION OF THE BITCOIN WHITEPAPER :-

The paper concludes:

• Where honest nodes control the majority of CPU power, a peer-to-peer network that uses proof-of-work to record public transactions makes it computationally impractical for attackers to tamper with the network strength lies in its unstructured simplicity.

• Nodes working independently with little coordination.

• Nodes can leave/rejoin the network as they wish, relying on the proof-of-work chain as proof of what happened while they were gone

• Nodes vote with their CPU power, acceptance of a block is recognised by working to extend it.

•Rejection of invalid blocks is highlighted by refusing to work on them.

•Any required rules and incentives are enforced through the consensus mechanism.