Bitcoin for dummies

A look at Satoshi Nakamoto’s white paper describing Bitcoin and how the blockchain came to be

Bitcoin’s official document details an alternative electronic money system. The document was originally published in October 2008 by Satoshi Nakamoto.

Bitcoin: Origins

In October 2008, Satoshi Nakamoto, the pseudonym used by the developer or developers of Bitcoin, published a white paper detailing how an alternative electronic money system could allow payments to be sent directly from one party to another, without the involvement of a financial institution.

The paper, titled “Bitcoin: A peer-to-peer electronic money system,” provides an overview of how key aspects of Bitcoin (BTC) can support an untrusted electronic money system using cryptographic proof.

The article defines an electronic coin as a chain of digital signatures. It also describes how an ownership transfer can be performed using the previous owner’s public and private key to create a digital signature, which is combined with the next owner’s public key into a transaction block.

Each block is linked to the previous block using a hash, and the entire block chain includes the entire decentralized registry that is created in the process.

This is how the term “blockchain” came about. To add transactions to a block, a timestamp server continuously transmits hashes to a network of nodes or computers on the network.

Using the SHA-256 hashing algorithm, each block can only generate one hash, and the BTC network uses this process to set the level of complexity so that a new block is mined every 10 minutes.

Known as the proof-of-work (PoW) system, it makes it impossible for any node to change any transaction on the blockchain, thus making it secure.

How the Bitcoin blockchain network processes transactions

All new transactions are broadcast to nodes. Each node tries to find a complex proof-of-work to place the new transactions in the block.

When a node finds a proof of work, it sends the block to all nodes and accepts it only if all transactions recorded in it are valid.

This translates into nodes creating the next block in the chain using the hash of the accepted block.

Since nodes consider the longest chain to be the correct one, when two versions of the blockchain are transmitted, nodes will work on both until one is longer and becomes the accepted version.

New broadcast transaction messages must reach all nodes because they will eventually be processed into a block and then made available to work on all nodes.

This allows nodes to contribute as much processing power as they want, disconnecting and reconnecting whenever they want to contribute to the network and add blocks to the Bitcoin blockchain.

Stimulating the computing power provided by recently released Bitcoins

Nakamoto introduced an incentive system for nodes to support the BTC network by distributing BTC instead of the computing power they provide, so that the entire network is free from double spending or attacks by attackers.

Thus, the first transaction in a block triggers a new BTC owned by the block creator, and nodes continue to support the network to mine new BTC.

As the number of Bitcoins in circulation increases, the processing power required to mine the new Bitcoin increases significantly, bringing to the forefront the aspect of transaction fees, which acts as a more regular incentive.

Once a given amount of BTC comes into circulation, transaction fees can make up the bulk of the incentive available to nodes and are considered completely inflation-free as an additional measure.

As a result, any potential attacker would find it more profitable to leverage additional computing power to mint more new coins and earn more incentives based on transaction fees than to try to steal funds by modifying the blockchain with its new version.

Securely manage multiple transactions with a new privacy model

The Nakamoto white paper also describes how hashing transactions in the Merkle tree can save disk space and simplify payment verification without running a full network node.

What sets the BTC network apart from traditional banking channels, however, is the privacy it provides – even though all transactions are translated into a public blockchain.

This is done by keeping public keys anonymous and requiring a new key pair for each transaction.

Although transactions are made public and trust is maintained by a network of nodes that verify each block of transactions, the identities of its users can be placed behind an impenetrable firewall through the use of shifting key pairs.

Using the structure of digital coins created from digital signatures and combining elements of cryptography, BTC Whitepaper offered a peer-to-peer transaction network that introduced a revolutionary new way of transacting. It is secure, borderless and accessible to all.

Sasha Tanin

Editor with ten years of experience, managed to work for "Rolling Stone" and several other publications, created his own niche media.
Back to top button