In October 2008, Satoshi Nakamoto — a pseudonym used by the developer or developers of bitcoin — published a whitepaper detailing how an alternative electronic cash system could permit payments to be sent directly from one party to another, without involving a financial institution.
The document, titled "Bitcoin: A Peer-to-Peer Electronic Cash System," provided an overlook of how key aspects of Bitcoin (BTC) could support a trustless electronic cash system by using cryptographic proof.
The paper defines an electronic coin as a chain of digital signatures. It also outlines 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 into a transaction block.
Each block is linked to the previous one using a hash, and the entire chain of blocks comprises the entire decentralized ledger being built in the process.
This is how the term blockchain came into existence. For transactions to be added onto a block, a timestamp server continuously broadcasts hashes onto the network of nodes, or computers, in the network.
By employing the SHA-256 hashing algorithm, each block can generate only one hash and the BTC network uses this process to set a level of difficulty so that a new block is mined once every 10 minutes.
Known as the proof-of-work (PoW) system, it makes it impossible for any node to alter any transaction in the blockchain, thereby making it secure.
How The BTC Blockchain Network Processes Transactions
All new transactions are broadcast to nodes. Each node tries to find a difficult proof-of-work to fit the new transactions into a block.
When a node finds a proof-of-work, it broadcasts the block to all nodes and accepts it only if all 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 nodes consider the longest chain to be the correct one, if there are two versions of the blockchain being transmitted, the nodes will work on both till one becomes longer and the accepted version.
New transaction broadcasts must reach all nodes since they will eventually be processed into a block and will then be available for all nodes to work on.
This allows nodes to contribute as much computing power as they desire, switching off and switching back in whenever they wish to contribute to the network and add blocks to the bitcoin blockchain.
Incentivizing Computing Power Provided With Newly-Minted BTC
Nakamoto envisioned an incentivization system for nodes to support the BTC network by distributing BTCs in lieu of computing power being contributed by them in keeping the entire network free from double spending or being attacked by bad actors.
Thus, the first transaction in a block starts a new BTC that is owned by the creator of the block, and nodes continue to support the network in order to mine new BTCs.
As the number of BTCs in circulation increases, the computing power needed to mine a new Bitcoin increases considerably and brings to focus the aspect of transaction fees that acts as a more regular incentive.
Once a predetermined number of BTC enter circulation, transaction fees can form the bulk of the incentive available for nodes and are deemed to be completely inflation free for added measure.
As a result, any potential attacker would find it more profitable to deploy the additional computing power to mint more new coins and earn more transaction fee-based incentives, than trying to steal funds by altering the blockchain with a new version of it.
Managing 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 facilitate payment verification without running a full network node.
What set the BTC network apart from traditional banking channels, however, was the privacy it provided — even though all transactions are broadcast to the public blockchain.
This is done by keeping the public keys anonymous and necessitating that a new key pair be used for each transaction.
Although transactions are made public and trust is maintained by the network of nodes verifying every block of transactions, the identities of its users can be placed behind an impenetrable firewall by virtue of the changing key pairs being used.
Using a framework of digital coins made from digital signatures and combining elements of cryptography, the BTC Whitepaper proposed a peer-to-peer transaction network that introduced a revolutionary new way of transacting. It's secure, borderless and accessible to all.
Image courtesy of Pixabay
