Satoshi Nakamoto published the Bitcoin whitepaper on October 31st, 2008 with the title – Bitcoin: A Peer-to-Peer Electronic Cash System. This article is a summary of this whitepaper for the non-technical bitcoin investors.
Who is Satoshi Nakamoto?
Despite several high-level investigations and research, the identity of Satoshi Nakamoto is yet to be uncovered.
Nobody knows whether Satoshi is an individual or an organization using the fictitious name.
What is Bitcoin?
Bitcoin is purely peer-to-peer electronic cash that allows online payments to be sent directly from one person to another without going through a financial institution such as banks.
Payments made with bitcoin are permanent and cannot be changed as transactions are structured to be computationally impractical to reverse.
Why Was Bitcoin Created?
Primarily bitcoin was created to decentralize finance.
Bitcoin is proposed as a solution to the problem of double-spending and the inherent weaknesses of the trust-based, centralized traditional financial system.
The goal of bitcoin is to make it possible for individuals like you and me who do not know each other to be able to do business or transact directly with one another without having to trust a third party and with assurance that the coins have not been previously spent.
More so, with the current financial system, there’s a limit to the minimum amount you can send for example –between the US and China –thus small transactions are not supported; coupled with the high cost of making the payments which is escalated by the need for the banks and other intermediaries to make profit off every transaction.
These costs and the possibility of transactions being reversed can be avoided in person by using physical currency, but there is no system in place to make payments over a communications channel without going through a trusted party –banks.
Bitcoin solves all of the above problems:
- Bitcoin transactions cannot be reversed
- You can send any amount –even $0.50 at a cost as low as $0.005 or less.
- No intermediary or third-party needed.
- Payments are settled instantly regardless of the distance between parties.
In simple sentences, bitcoin was created to put the financial system in the hands of the people. For the first time in history, you’re empowered to have control over your own financial freedom and autonomy.
How Does Bitcoin Work?
All bitcoin transactions are identified with a hash that a publicly broadcasted for everyone to see. All hashes generated within a specific time period frame (every 10 minutes) are grouped into blocks. These blocks of transactions are linked together with every new block added to all existing blocks before it to form a blockchain.
For any transaction to be valid it must have been confirmed by the majority of “miners” who utilize their computing powers to verify the blockchain transactions. Once a transaction is verified and added to a block, it can’t be changed and any attempt to spend the coins already included in that transaction is rejected by the network.
As new blocks are added to the chain of blocks (blockchain) it becomes practically impossible to alter any previous transactions without having to re-process all the other blocks which were added after it. This is not practical at all and that’s what makes the bitcoin network secure and makes double-spending impossible.
Is Bitcoin Sustainable?
The bitcoin network is maintained by the activities of “Miners” who help in producing new blocks and verifying blockchain transactions.
Miners earn block rewards for each new block they add to the blockchain. More so, this block rewards which distributed to miners for producing new blocks provides a way to initially and systematically distribute all bitcoin into circulation, since there is no central authority to issue them.
Currently, miners earn 12.5 full bitcoin for each block that’s produced and added to the blockchain.
In addition to the block rewards, miners are incentivized to support the network with transaction fees. Every bitcoin transaction is charged a small fee that goes to pay the miners who confirm such transactions on the blockchain.
Once the total number of bitcoin (21,000,000) has been mined and released to the market miners’ incentives will entirely be on transaction fees.
How about a possible 51% attack?
If a single entity or group of miners are able to gain more than 50% of the network they would have to choose between using it to defraud people by stealing back their payments or using it to generate new coins by producing new blocks and verifying transactions and claiming the fees.
It’s in their best interest to act in a way that supports and promotes the health of the network. If they act in such a way to collapse the network they stand to lose more money than everyone else combined as they have the largest investment in the network.
More so, an attacker can only try to change one of his own transactions to take back money he recently spent. This means that:
- He cannot attempt to change someone else’s transactions
- The transaction has to be recent. Old transactions can’t easily be changed
These drastically reduce the benefits of a successful 51% attack; making it not worthwhile for an attacker.
Bitcoin and Privacy
All bitcoin transactions are publicly available for anyone to see through the blockchain explorer. However, these movements of funds cannot be linked to any particular individual.
The public can see that someone is sending money to someone else, and that’s all. The parties involved in the transactions are unknown.
“This is similar to the level of information released by the stock exchanges, where the time and size of individual trades –the "tape"– is made public, but without telling who the parties were.” ~Satoshi.
Additionally, users can generate new public addresses for every transaction to further obfuscate their identity in case some already identified them with a known public key or wallet address.
Summary of Summary
Bitcoin provides trustless means of executing electronic payments of any denomination and tactfully solves the problem of double-spending without a trusted third party.
The integrity of the Bitcoin network is maintained through a proof of work system that records a public history of transactions that quickly becomes computationally impractical for an attacker to change.
Bitcoin can be considered as the greatest invention of the century, what do you make of it? Share your thoughts in the comments section below.