Source: pixabay.com

On October 31, 2008, a mysterious entity called Satoshi Nakamoto (claiming to be a middle-aged Japanese man) published a research paper that shook the grassroots of the world economy as we knew it. His whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System” spoke about a digital monetary system entirely based on cryptography, involving no trusted third party in any part of the transaction.

A digital currency system was not a new concept by any means, but the previously described currencies had security problems and glitches that prevented them from being implemented. This was the first time someone gave us a solution to the problem of “double spending”, i.e., the use of the same “token” or “coin” more than once. The paper is in excellent English and remarkably easy for even the general public to understand. In just 9 pages, the enigma that is Satoshi, (who vanished into thin air in April 2011) managed to quite literally change the world. Rumours run rampant, that despite his radio silence, he’s still out there. Especially because he vanished with over a million dollars in his account! In fact, it is said that this is the biggest revolution in economy since humans first started using money!

Here’s an abstract of the research paper:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.”

Introduction

In the introduction, Satoshi describes the need for such an electronic system, citing corruption as the reason. The current banking system functions just as well except for an inherent problem–people are forced to trust a random third party to verify the authenticity of their transactions. People have to place a blind trust in banks and other financial institutions. Entrusting them not to steal our money is not the easiest thing to do.

In cases of discrepancies and disputes, there needs to be a provision of reversibility. Banks need to be able to change a transaction if need be! That doesn’t instill enough confidence among investors and sellers. Your private financial details are at the mercy of the banks’ security system to a great extent. Even though keeping money in your bank is safer than keeping it stashed away at home, there’s always an element of risk about who gets access to your financials.

The paper thus argues the need for a decentralized system based entirely on cryptography, which doesn’t need investors to trust a single entity. The would allow the buyer and seller to interact directly, exchanging the currency electronically. Programming can be done such that the transaction is irreversible, protecting sellers. Since no third party is involved, risk to buyers’ money is reduced right there. The problem of double-spending remains, however, and Satoshi’s whitepaper was so revolutionary because it apparently solved this problem. The solution suggested was to timestamp the transactions in such a way that the currency cannot be spent twice.

source: Shutterstock.com

Methodology

This is actually split into several sections, but a lot of them have technical aspects which are difficult to understand.

Transactions

The “Transactions” section explains how a Bitcoin transaction would actually take place. An electronic coin or a “bitcoin,” here, is a chain of digital signatures. Everyone in this network of cryptographic currency has a public key. Each owner digitally signs a small part of the previous transaction, called a hash and also assigns it with the public key associated with the receiver. The payee can verify the previous owner’s signature as proof of ownership. The paper proposes that the problem of double-spending could be solved by making all the transactions public. If everyone is aware of all the transactions taking place, and of the public key and amounts involved in each, no one can actually spend the same money twice. It’s a simple but extremely clever solution to the problem that plagued digital scientists since the idea of digital currency first came about in 1998.

What is the Timestamp Server?

A matrix for Bitcoin: Image source: pixabay.com

The “Timestamp Server” section of the research paper goes into more detail on how double-spending of a coin is actually prevented. This is achieved by what is called a timestamp server, in which a “hash” of items are time stamped and widely publicized. Thus, proving that the particular data existed at the time. As the chain of transactions continues, the hash gets longer. Each time a transaction occurs, a timestamp is added. This means that each timestamp contains the previous timestamp, too.

Proof-of-work technology

This section is followed by a section called “Proof-of-work” which goes into more detail about how to implement the timestamp server system. The “Network” section then describes how the blockchain network, as a whole, works. This section is especially helpful for miners who are looking to mine more bitcoin. It talks about the infrastructure required in terms of server storage space. Keeping a decentralized record of transactions of course takes up disk space as well as RAM. It highlights an efficient space saving way to store transactional information i.e. just storing headers of the blocks.

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Privacy

The only question left to be addressed now, was that of privacy. If every transaction is made public, then everyone would know what the others were buying, when, and for how much! One way to ensure privacy was to keep transactions anonymous. The public keys should be kept anonymous, meaning that people will know that someone is sending an amount to another person, but no one will know their identities.

However, if someone were to track the transactions of the owner of a particular key, they would be able to know the person’s transactions’ history. This may lead a party to judge people based on their past transactions. External developers have since tried to solve this challenge, resulting in new currencies Monero and Dash. The fork that managed to give users the most privacy, eventually, was Zcash.

Source: Shutterstock.com

Conclusion

Satoshi describes the Bitcoin, summarises the entire transaction process including the workings of timestamp and proof-of-work, mentions the challenges of privacy and talks about incentives and consensus among members of the larger digital currency community.

This paper was released almost 10 years ago, and the system has taken leaps and bounds ever since. Bitcoin has experienced hard forks and soft forks. Other digital currencies have emerged on the scene and even they have experienced their own forks.

Now, the cryptocurrencies market is stronger and robust than ever. All thanks to a 9-page whitepaper that completely changed the way we transact today!