- Introduction
Nowadays, online commerce is centered almost entirely around third-party financial institutions. For any transaction to occur online, money must be directed through these third parties. This system, while rather efficient, still has weaknesses, namely a trust-based model. How this works is simple. If there is a transaction in your account where it says that you just bought a new car and the bank sends you a bill asking that you pay for it, but you claim that you hadn’t bought a car and that a hacker entered into your account and bought it for you, a dispute is created. Then there’s the hassle of ensuring that a hacker had indeed hacked into your account and bought a car, creating a whole investigation into your account, payment history, income, etc. Obviously, this system is inefficient and wastes time and money, stemming from the need for the trust-based model.
The solution is “an electronic payment system based on cryptographic proof instead of trust," otherwise known as cryptocurrency or bitcoin. This system eliminates the need for a third-party by allowing a transaction between the buyer and seller to occur directly, and without the need for trust, the efficiency of this system is unmatched.
2. Transactions
This cryptocurrency works in the form of an electronic coin made up of digital signatures, and when the coin is transferred, a hash of the previous transaction is made and assigned to that coin. However, there is no verification that the coin was already spent, also known as "double-spending." To counter this, all transactions must be monitored, with the earliest transaction being the only one to be counted. Previously, a third party would privately monitor these transactions to determine the earliest one, but there are no third parties in this system, so all transactions must be publicly published. Yet the majority of the nodes must still agree on which transaction was the first received.
3. Timestamp Server
In order to ascertain which transaction was the first received, all transactions must go through a timestamp server. Through this server, a hash of the block of items is timestamped and published publicly. This timestamp then proves publicly that the data must have existed at that time based on the existence of that certain hash. Additionally, each timestamp contains the previous timestamp within the hash, which then forms a chain of timestamps.
4. Proof-of-Work
The proof-of-work is a system that scans for values when hashed, which begins with a certain number of zero bits. The work required is exponentially related to the number of zero bits required, which can be verified by executing a hash. In this proof-of-work, a once value is incremented until it reaches a value that creates a hash with a certain number of zero bits. After the CPU has satisfied the proof of work, the block cannot be changed unless all the work is redone. When the block is chained, the work to change the blocks involves changing all the blocks after it as well.
This proof-of-work also establishes the representation system where instead of a one-IP-address-one-vote (which would be unfair for someone who could allocate many IP addresses), there is a one-CPU-one-vote. The majority decision is seen through the longest chain, since it is the one that has the longest proof of work in it. Additionally, if the majority of CPUs are honest nodes, then the honest chains will outcompete any attacker who attempts to redo all the blocks, and unless the attacker has more CPUs than there are honest nodes, work cannot be undone.
5. Network
There are 6 basic steps the network follows as it runs:
1) New transactions are broadcast to all nodes, so all nodes have a copy of all transactions
2) The transactions are assembled into a block by each node
3) Nodes work individually to find a difficult proof-of-work for the block
4) If a node finds a difficult proof-of-work, then that specific block is broadcast to all nodes.
5) Other nodes determine whether the transactions in the broadcasted block are valid
6) If validated the nodes then work on creating the next block, with the hash of the previous block being used as the previous hash.
One key rule the nodes follow is that they always accept the longer chain as the correct one and will always work on extending that specific one.
6. Incentive
There are three main incentives in the system:
Starting Coins: The first transaction in a block is special since that transaction starts a new coin that is owned by the creator of the block, encouraging nodes to support the network rather than attack it. Since there is no central authority to create these coins, this system provides a way to distribute them.
Transaction Fees: The value of a block is increased if the output value is less than the input value, and specifically by the difference between the two.
Attackers: It is more profitable to generate more coins than to steal back payments, if that attacker holds more CPU power than all honest nodes. Through this incentive, it eliminates the chance that attackers try to defraud people.
7. Reclaiming Disk Space
To save disk space, transactions recorded before the recent ones can be discarded. Following a Merkle Tree pattern, old blocks can be discarded by stabbing off branches of the tree. Additionally, the interior hashes aren’t stored, resulting in a block header without any transactions, making its total size 80 bytes. Since these blocks are created every 10 minutes, then:
80 bytes * 6 * 24 * 365 = 4.2MB per year
However, with the current growth in the storage of computer systems, storage should not be a big concern. Also, this reclaiming has not been used in current systems.
8. Simplified Payment Verification
Payments can be verified in a simpler manner, where they don’t undergo a full network node. In this process, the user keeps a copy of the longest chain, and then by obtaining the Merkle branch, it is linked to the transaction in the block it’s timestamped in. After linking it to a place in the chain, a network node accepts it, and blocks added after it confirm this acceptance.
This method of verification, however, becomes more vulnerable when the network is overpowered by an attacker. Although the network nodes can verify the transactions, this method can still be overpowered for as long as the attacker continues to overpower the network. To prevent this, alerts could be sent by the network nodes when they detect an invalid block, which would then cause the user to download the full block.
9. Combining and Splitting Value
It would be inefficient to make a transaction for every cent in a transfer, so value can be split and combined with transactions containing multiple inputs and outputs. Normally, however, a transaction contains one large input or multiple smaller inputs with at most two outputs: one for payment and the other for change back to the sender.
10. Privacy
In traditional systems, the level of privacy is limited to giving access to information to the parties involved and a third party. However, in bitcoin, all transactions are publicly released, but if public keys are kept anonymous, then the public will only see that one entity is sending money to another without knowing who either is. Additionally, new key pairs can be used after each transaction to limit any linking to a common owner.
12. Conclusions
Bitcoin is a system of electronic transactions that, unlike other methods, does not rely on trust. Based on a digital signatures framework, this system inhibits a strong control of ownership and with a proof-of-work along with timestamp and incentives to prevent attackers and double-spending.
Double-spending as defined by a fourth grader:
I have a younger brother, who, after hearing me talk about double-spending, gave me an example of it, which was that at school they were having a party, and with a set amount of money the teacher would buy everything for the party or the students would each buy a few things, but now both.
FAQ
1. How do you mine bitcoin?
To mine bitcoin, you use a bitcoin mining machine such as an ASIC.
2. Which country mines the most bitcoin?
China has more bitcoin mining facilities than any other country.
3. Who created bitcoin?
No one knows, but he goes by the anonymous name of Satoshi Nakamoto.
4. What is the maximum amount of bitcoin that will be created?
Bitcoin will only be created until 21 million of them exist.
5. What is mining?
Mining is the use of a CPU and electricity to perform a difficult proof-of-work
6. What is the current value of bitcoin?
The current value of bitcoin is $16,585.10
7. What was the highest value of bitcoin?
The all-time high for bitcoin was $67,549,
8. What percentage of mining equipment is owned by different countries?
In order from highest to lowest:
US: 37.86%
China: 21.11%
Kazakhstan: 13.22%
Canada: 6.48%
9. Why has China banned bitcoin mining?
Bitcoin mining used an exorbitant amount of energy, so proof-of-work mining was completely banned.
10. Where can you buy bitcoin?
Bitcoin can be bought through various methods: centralized exchanges (Binance, Coinbase, Kraken), P2P (localbitcoin.com, localcrypto.com), or earned by mining.
11. How much time does it take to complete a transaction?
A transaction takes up to about 10 minutes, but can be lower depending on what stage of confirmation the block was in when the transaction was submitted.
12. When was bitcoin first made?
January 3, 2009, supposedly by Sathoshi Nakamoto.
13. What is the bitcoin ledger and how big is it?
The bitcoin (public) ledger is a record of all bitcoin transactions since Nakamoto created the first block on January 3, 2009. It is currently about 445.88 GB.
