Table of contents
Can refer to this link : Bitcoin white paper
Introduction
- Problem Statement: The goal is to create a purely peer-to-peer version of electronic cash, enabling online payments to be sent directly from one party to another without needing a financial institution or trusted third party.
- Purpose: Introduces a decentralized digital currency system that eliminates the need for intermediaries like banks.
- Main Problem: Double spending in digital currencies, where a single digital token could be spent more than once.
Defining Electronic Coins in Bitcoin
Concept of an Electronic Coin
- Definition: An electronic coin in Bitcoin is defined as a chain of digital signatures. This chain represents the ownership history of the coin, tracking each time it changes hands.
How Ownership is Transferred
Transaction Structure:
Each time a coin is transferred, the current owner signs a digital hash of the previous transaction.
The hash includes:
The Previous Transaction: Proof of how the current owner acquired the coin.
The Public Key of the Next Owner: Designates the new owner of the coin.
Digital Signatures:
The current owner uses their private key to create a digital signature, adding it to the end of the coin’s chain and effectively transferring ownership.
Hash of the Transaction: A unique string generated from the transaction data, ensuring even a small change produces a completely different hash.
Public Key of the Next Owner: Serves as the address to which the coin is sent; only the holder of the corresponding private key can access and spend the coin.
Verification of Ownership
Verification Process:
The payee can verify the transaction’s authenticity by checking the chain of digital signatures.
This involves:
Verifying the Signatures: Ensuring each signature in the chain is legitimate by checking against the corresponding public key.
Verifying the Chain of Ownership: Tracing back the chain of transactions to confirm that the coin’s ownership has been validly transferred.
Chain of Ownership
- Purpose: The chain of digital signatures serves as a record of ownership, proving that the current owner has legitimately acquired the coin.
- Security: Ensures that the ownership of the coin is secure and can be verified without relying on a central authority.
Digital Signatures
- Partial Solution: Digital signatures ensure the authenticity and integrity of a transaction. While crucial for securing transactions, they do not fully solve the double-spending problem.
- Double-Spending Problem: Refers to the risk of a single digital token being spent more than once, an issue arising from the ease of copying digital information.
- Transactions are secured with digital signatures.
- Each Bitcoin user has a pair of cryptographic keys: a public key and a private key.
- The private key signs transactions, ensuring only the owner can spend their Bitcoins.
Peer-to-Peer Network and Proof-of-Work (PoW)
- Proposed Solution: Solving the double-spending problem using a peer-to-peer (P2P) network. The network’s key innovation is the proof-of-work mechanism.
- Network Operation: Nodes in the network validate and relay transactions.
Timestamps and Hashing:
Each transaction is timestamped and hashed into a chain (the blockchain).
The chain is secured through proof-of-work, where nodes (miners) expend computational power to solve cryptographic puzzles.
Immutable Record:
The blockchain forms an ongoing, immutable record of transactions.
Once a block is added to the chain, it cannot be altered without redoing the proof-of-work for that block and all subsequent blocks.
- Mining Process: Nodes (miners) solve complex mathematical problems to validate transactions and add them to the blockchain.
- Rewards: The first miner to solve the problem gets to add a new block and is rewarded with newly minted Bitcoins.
What is Proof-of-Work?
- Concept: Proof-of-work is a cryptographic mechanism where participants (miners) must perform computational work to solve a problem. In Bitcoin, this problem involves finding a value that, when hashed using a cryptographic hash function like SHA-256, produces a hash with a certain number of leading zero bits.
- Origin: The PoW system used in Bitcoin is similar to the one proposed by Adam Back in Hashcash, originally designed to combat email spam by requiring senders to perform a small amount of computational work.
How Proof-of-Work Works
- Hash Function: Bitcoin uses the SHA-256 hash function, which takes an input and produces a fixed-size output (the hash). The goal is to find an input (a block of transactions) that produces a hash beginning with a specific number of zero bits.
- Difficulty: The number of leading zero bits required in the hash determines the difficulty of the proof-of-work. The more zero bits required, the harder it is to find such a hash. The difficulty is set to maintain a consistent average time to find a solution across the network.
Longest Chain Rule
Chain Validity:
The longest chain in the blockchain is considered valid because it represents the most computational work (CPU power) invested.
This chain serves as proof of the sequence of events (transactions) and indicates that it was generated by the majority of the network’s computing power.
Security Assumption:
The network's security relies on the assumption that a majority of CPU power is controlled by honest nodes.
As long as this is true, the honest nodes will always generate the longest chain, outpacing any attackers.
- Once a transaction is confirmed and added to the blockchain, it cannot be altered.
Network Structure and Operation
Minimal Structure:
The network is designed to operate with minimal structure.
Nodes do not need to follow strict protocols or maintain constant connectivity.
Broadcasting and Rejoining:
Transactions and blocks are broadcasted to the network on a best-effort basis.
Nodes can leave and rejoin the network at will. When they rejoin, they accept the longest proof-of-work chain as the authoritative record of transactions.
- Resilience and Flexibility: This decentralized approach ensures the network’s resilience and flexibility, allowing it to continue operating even if some nodes go offline or the network is under attack.
Incentives and Mining:
Miners are incentivized to secure the network through block rewards and transaction fees.
As more miners join, the difficulty of the mathematical problems increases, maintaining a steady block generation rate.
Limited Supply:
Bitcoin has a fixed supply of 21 million coins, designed to create scarcity and mimic precious metals like gold.
The block reward halves approximately every four years in an event known as "halving."
Decentralized Ledger (Blockchain):
Transactions are grouped into blocks and linked together to form a blockchain.
The blockchain is a public ledger, visible to all participants in the network.
Each block contains a list of validated transactions and a reference (hash) to the previous block, ensuring immutability.
Security and Attacks:
The network is secure as long as honest nodes control more CPU power than any attacking group.
Discusses the "51% attack" scenario, where a malicious actor with more than 50% of the network's hashing power could potentially alter the blockchain.
Applications and Implications
- Decentralization: Bitcoin’s model removes the need for centralized financial institutions.
- Trust: Users do not need to trust a third party; trust is placed in cryptography and the network itself.
- Global Currency: Bitcoin can be used globally without restrictions, offering an alternative to traditional currencies.
- Future of Finance: Paved the way for the development of other cryptocurrencies and the broader decentralized finance (DeFi) ecosystem.