In October 2008, Satoshi Nakamoto – a pseudonym used by the developer or developers of bitcoin – published a white paper detailing how an alternative electronic payment system could allow payments to be sent directly from one party to another, without involving a financial institution.
The paper, titled “Bitcoin: A Peer-to-Peer Electronic Payment System,” provided insight into how key aspects of Bitcoin (BTC) could support a trustless electronic payment system using cryptographic proof.
The document defines an electronic document as a chain of digital signatures. It also describes how ownership transfer can be executed by using the previous owner’s public and private key, to create a digital signature that is combined with the next owner’s public key in a transaction block.
Each block is linked to the previous one using a hash, and the entire blockchain includes the entire decentralized ledger being built.
This is how the term blockchain was born. For transactions to be added to a block, a timestamp server continuously broadcasts hashes to the 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 a difficulty level so that a new block is mined once every 10 minutes.
Known as the proof-of-work (PoW) system, it prevents any node from modifying a transaction in the blockchain, thereby securing it.
How the BTC Blockchain Network Processes Transactions
All new transactions are broadcast to the nodes. Each node tries to find a hard proof of work to insert the new transactions into a block.
When a node finds a proof of work, it broadcasts the block to all nodes and only accepts it if all the transactions recorded in it are valid.
This is expressed by nodes creating the next block in the chain using the hash of the accepted block.
Since the nodes consider the longer chain to be the correct one, if two versions of the blockchain are passed, the nodes will operate on both until one becomes longer and the version is accepted.
New transaction broadcasts must reach all nodes because they will eventually be processed in a block and then be available for all nodes to work on.
This allows nodes to contribute as much computing power as they want, turning off and on again whenever they want to contribute to the network and add blocks to the bitcoin blockchain.
Computing Power Incentive Provided with Newly Created BTC
Nakamoto envisioned an incentive system for nodes to support the BTC network by handing out BTC instead of the computing power they contribute to prevent the entire network from doubling up on spending or being attacked by bad actors.
So the first transaction in a block starts a new BTC that belongs to the creator of the block, and the nodes continue to support the network in order to mine new BTC.
As the number of BTCs in circulation increases, the computing power required to mine new Bitcoin increases dramatically and leads to a focus on the transaction fee aspect which acts as a more regular incentive.
Once a predetermined number of BTC enters circulation, transaction fees can form the bulk of the incentive available to nodes and are deemed to be completely inflation-free for an added measure.
As a result, any potential attacker would find it more profitable to deploy the extra computing power to mint more new coins and earn more incentives based on transaction fees, than trying to steal funds by modifying the blockchain with a new version of it.
Manage multiple transactions securely with a new privacy model
Nakamoto’s whitepaper also describes how hashing transactions in a Merkle tree can save disk space and make it easier to verify payments without running a full network node.
However, what sets the BTC network apart from traditional banking channels is the privacy it offers, even though all transactions are broadcast on the public blockchain.
This is done by keeping the public keys anonymous and requiring the use of a new key pair for each transaction.
Although transactions are made public and trust is maintained by the network of nodes verifying each block of transactions, the identity of its users can be placed behind an impenetrable firewall due to the changing key pairs used.
Using a framework of digital coins made up of digital signatures and combining elements of cryptography, the BTC white paper proposed a peer-to-peer transaction network that introduced a revolutionary new way of transacting. It’s secure, borderless and accessible to everyone.
Image courtesy of Pixabay
#Satoshi #Nakamotos #Bitcoin #White #Paper #Birth #Blockchain
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