Bitcoin, both the network and the cryptocurrency, have been in circulation for the past twelve years and have grown to unprecedented levels over the past decade. What most enthusiasts don’t know is how the trillion-dollar asset was first introduced to the world; through a pdf document.
Published on October 31st of 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System” was created as a solution against the Global Financial Crisis, providing a supply-capped monetary system that was fully decentralised and incorruptible. The document, which utilises mathematical concepts that date back to 1957, was submitted under the pseudonym “Satoshi Nakamoto”. The real identity of the creator(s) is yet to be discovered.
Here we provide a summary of the most important information covered in the Bitcoin whitepaper, narrowing it to crucial points to give readers an understanding of why bitcoin was created and what its developer(s) sought to accomplish.
The purpose of the Bitcoin network was to essentially eliminate the trust-based model of digital transactions by creating a digital representation of hard cash. Whether shopping for clothes online or using credit cards in stores, the payment standard until then was always done through financial institutions that approve and execute each transaction. By creating an electronic cash system, it eliminates the need for trust in third-party providers. The goal was accomplished by creating an asset, bitcoin, that allows peer-to-peer transactions that are immutable and encrypted through cryptography to protect users from fraud.
The bitcoin whitepaper sought to fulfil the frameworks of what has been considered sound money throughout the ages. Bitcoin needed to function as a medium of exchange, unit of account and store of value. In creating a sound alternative to the existing monetary system, Satoshi also imbued the principles of durability, divisibility, portability, intrinsic value and scarcity.
For the system to work, what is now called the “Blockchain” was created. The transactions occur in a cooperative network that is kept active by sharing the transactional tasks with all computing systems that use it. When someone wants to transfer bitcoin to another user of the blockchain, the network verifies when the sender first received that amount (previous block) and confirms the amount they are now transferring to the receiver (future block). That way, the network asserts that the amount will no longer be in the sender’s funds, with an irreversible transfer to the receiver, and so on.
To ensure all transactions are verified, and there’s no room for fraud, the Bitcoin network made them public, allowing any user to access a record of transactions on the bitcoin blockchain. Each transaction is registered in what the whitepaper calls a “timestamp” that displays where the amount existed previously and where it is heading, thus creating the chain of blocks.
Double-spending surfaced once digital assets and currencies first became available, with the possibility of respending the same asset. After all, P2P platforms existed more than a decade before bitcoin, where users could transfer files but still create duplicates in their computers through a simple copy and paste process. How does bitcoin prevent that from happening?
For double-spending to be avoided, every transaction in the blockchain is verified by all existing nodes, running programs that host and synchronise copies of the whole blockchain. Most computers available today can become a node, which helps the blockchain in validating transactions and blocks. Since every transaction is publicly announced, verified by nodes and sender/receiver, the chance of double-spending is significantly reduced the more nodes the network has.
Proof of Work
To prove that the transactions are functioning correctly, a Proof of Work (PoW) system was implemented. The PoW works by attributing each transaction to a random number that’s attached to a small puzzle. To conclude the transaction, the sender’s system must solve the mathematical puzzle and send it through to the receiver’s, which checks it into the chain. Once proven correct, the transaction is executed. The process of puzzle-solving locks each transaction history into blocks of the network that are piled up and grow in size as more transactions are concluded. Reversing transactions would require immense computational power; 51% of bitcoin’s entire hashpower to reverse a single hour of transactions, for instance. To ensure proper PoW, those running the operations are compensated in bitcoin according to the number of validated transactions. That’s called bitcoin mining.
Bitcoin mining – the incentive
Mining bitcoin simply means using one’s computing system to process blockchain transactions. In return, miners are compensated in bitcoin as new transaction blocks are created and dictate how the network operates under a 51% majority system. The mining process is what the bitcoin creator(s) calls the incentive; a reason for people to keep a fully decentralised network up and running while making sure that it continues to grow in adoption. The whitepaper also mentions a predetermined number of coins to be mined, resulting in bitcoin’s maximum supply of 21 million. Once all coins are mined, the incentive will continue in the form of transaction fees which oscillate freely and rely on the shifting hashrate of the network.
To learn more about bitcoin mining and how it works, read our article “Bitcoin mining: An overview”.
Solving the Byzantine Fault
Byzantine Fault is the potential issue facing computers that participate in a shared system, where the framework might fail if the participants disagree on a strategy for the network. The Fault presumes that some members are corrupt, inefficient or non-democratic, noting that a single point of failure is enough to jeopardise the entire approach.
Bitcoin’s blockchain solves the Byzantine Fault through its Proof-of-Work algorithm, allowing new strategies to be implemented only if 51% of the network agrees with the process. As the number of miners continues to grow, the chances of malevolent participants taking over the blockchain get increasingly unlikely. According to Business Insider data, there are around one million miners currently active globally, which would take roughly 510,000 individuals to agree on intentionally jeopardising the blockchain for the Byzantine Fault to be successful.
Privacy was one of the biggest concerns leading to the Bitcoin creation; the possibility of transacting funds in a secure network without compromising personal information to third parties. The idea of privacy-enhancing technologies dates back to the early 1990s with the rise of the Cypherpunk movement, cryptography enthusiasts who researched ways to make digital systems more private and under the sole authority of its users. The fundamental concepts of the movement can be seen in “A Cypherpunk’s Manifesto,” written by mathematician and programmer Eric Hughes.
While traditional banking systems limit user information in transactions, it still relies on the account owner trusting the institution to be able to access their data and to safeguard their privacy. In the Bitcoin network, all account owners are identified by their addresses; random sequences of 26-35 characters. To send or receive assets, all a user needs is the blockchain address to interact with. The public can see all bitcoin transactions in the blockchain with ultimate transparency, but the chain only registers the addresses without linking the transaction to private information.
Take Pay ID, for instance; even if the account owner utilises a randomly generated email or one-time cellphone number to register and conclude transactions, the ID is attached to their banking provider containing full name, social security number, home address, etc. With blockchain addresses, the random characters represent all the information needed.
Satoshi Nakamoto concludes the whitepaper with a summary of what was covered. The document proposed a transaction system that doesn’t rely on third parties and prevents double-spending through a peer-to-peer network with public registration of all transactions that cannot be corrupted or reversed. Nakamoto clarifies that the entire network can be modified through a voting system between nodes. Each node votes with their CPU power and, as long as the majority of the network consists of honest nodes, the entire system remains incorruptible.
That was the first and final official paper released on bitcoin. The first bitcoin transaction was in January of 2009, with the currency available for open purchase and trading in July of 2010. It’s been almost eleven years since the first bitcoin was publicly traded, a digital currency that now shakes the global market and challenges our previous concepts of money, value and trust.
CPU: Central processing unit of computers, e.g. an Intel processor.
Decentralised: A system that doesn’t rely on a central institution, being upgraded and legitimised by a democratic framework of contributors.
Double-spending: Potential flaw in digital finance, when a user can spend the same funds twice.
Peer-to-peer: Transactions that don’t involve a third party, directly from sender to receiver.
Pseudonym: Fictitious name.
Supply-capped: Limited supply of coins that cannot be maximised.
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