Summary: Bitcoin is a purely peer-to-peer new form of money that doesn’t require a third-party trust-based system. It is a permissionless network that allows any individual or organization to transmit value without the traditional financial system.
Core Takeaways – Bitcoin Whitepaper
This new electronic money system is peer-to-peer because of distributed nodes, cryptographically protected digital signatures, and a hash-based proof-of-work consensus mechanism that makes it financially irrational to alter or attack based on economics.
The current financial system has an inherent weakness of needing to be a trust-based model that relies on an approved trusted third party. Mediation increases transaction costs, ultimately leading to restricting certain types of transactions. An irreversible payments system, like bitcoin, does not need a trusted third party.
This paper provides a solution for an alternative system that will allow two parties to trade value directly, without a third party, that also has a solution to the double-spending problem.
Coins are defined as a chain of irreversible electronic signatures. In order to remove the trusted third party, all transactions within the system are publicly announced and verified by a majority of nodes.
A timestamp server allows to chronologically link each hash to each hash, thus making the ledger exponentially harder to alter the more transaction blocks that occur. The system reinforces itself.
This system is implemented on a distributed timestamp server rather than Usenet posts. Under this system, the block of data can’t be changed without redoing all the computational work required to redo it and all the blocks before it.
Proof-of-work is essentially one CPU one-vote. If a majority of the CPUs are honest nodes, the honest chain will grow the fastest and outpace any dishonest/competing chain.
The probability of an attack diminishes exponentially as blocks get chained together because the processing power required to alter them gets exponentially higher.
The steps to run the network are six fold.
- New transactions are broadcasted to all nodes
- Each node collects the new transactions into a block
- Each node searches for a difficult proof-of-work for this current block
- Once a single node finds a proof-of-work, it broadcasts that block to all the other nodes
- The majority of the other nodes only accept the new block if all transactions in it are valid (identical the previously chained blocks)
- Nodes begin working on the next block, using the hash from the previous block as the previous hash
Nodes will always consider the longest chain to be the correct one and will continue to work on it. If differing blocks are broadcasted by different nodes simultaneously the tiebreaker will go to the longer branch.
The node that created the last block gets paid in bitcoin, which incentivizes all the nodes to support the network. It provides a fair, noncentralized way to distribute the money supply meritocratically.
Resources expended to mine the new block are CPU time and electricity.
Attackers, if able to harness the 51% hashing power needed, will find it more profitable to play by the rules and continue the current uncorrupted chain than it would be to corrupt the chain.
Reclaiming Disk Space
Disk space is preserved by utilizing a Merkle Tree for the chain of hashes. Old blocks can be compacted by stubbing off branches of a tree, and the interior branches don’t need to be stored – this allows for nodes to remain nimble and in turn be much more decentralized.
Simplified Payment Verification
You can verify payments without running a full node. Users only need a copy of the block headers and the longest proof-of-work chain.
Combining and Splitting Value
Transactions are not treated separately, they are batched to allow value to be split and combined.
The traditional banking system allows privacy by limiting the parties allowed to see the transactions and making it a permission-based, closed network.
This system keeps public keys anonymous, without any identifying information thus allowing it to be a public ledger that maintains user privacy.
Furthermore, a new key pair is used for each transaction to keep them from being linked to a common owner.
Simply put, the economic incentives of this system make it a losing bet or financially unwise to attack the system. The computing power and electricity needed to attack the network are a. best served to receive the new coins as a reward to pay for those resources and b. would render those coins useless if the resources compromised the system.
As the chain gets longer, it becomes exponentially harder to break it.
This new electronic peer-to-peer-based cash system prevents double-spending because of the distributed nodes and proof-of-work consensus model. Nodes can leave and join as they please, it is a permissionless system. The unstructured simplicity of it creates a robust network.
Nodes don’t need to identify themselves in order to participate.
It becomes computationally and financially impractical to attack the system with the number of resources required in order to attack it.