Everything you need to know about Bitcoin White Paper. Part 3
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Everything you need to know about Bitcoin White Paper. Part 3

By Alessio Salvetti - 25 Aug 2018

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Read here the first and second parts of this Bitcoin guide.

Satoshi Nakamoto’s Bitcoin White Paper

The following message appeared on the Cryptography Mailing List on 31 October 2008:

I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf

The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending.

The message continued with the project’s abstract, Bitcoin: A Peer-to-Peer Electronic Cash System, and was signed by Satoshi Nakamoto.

The identity of the latter, considered the father of Bitcoin, has never been revealed. Many people believe that it is a multiple name, meaning a name that represents a collective. These are the most quoted hypothesis about his identity:

  • Nick Szabo: computer scientist and cryptographer, author of the Bit Gold paper, ancestor of Bitcoin and passionate about virtual currency issues.
  • Hal Finney: cryptographer participating in the Cryptography Mailing List. First person to receive a Bitcoin transaction from Nakamoto on January 12, 2009, after extracting the genesis block on January 3, 2009, at 18:15:05 GMT. Deceased on 28 August 2014 due to amyotrophic lateral sclerosis.
  • Dorian Prentice Satoshi Nakamoto: a physicist and systems engineer who has worked on government defence projects and technologies related to financial computing companies, residing for over 10 years in Temple City (the same city as Hal Finney).

Other hypotheses are related to groups of people (Neal King, Vladimir Oksman and Charles Bry), individual personalities (Michael Clear, Vili Lehdonvirta, Martii Malmi, Jed McCaleb), groups of companies (Samsung, Toshiba, Nakamichi, Motorola) or ultimately government organizations.

Beyond guesswork, the reliable data are:

  • the anonymity of the author of the paper and creator of the client has had the effect of a parricide and made the Bitcoin system a peer network, ergo no one “owns” the network, nor can force changes in the Bitcoin protocol (which is updated through free proposals – BIPs – which are eventually adopted by consensus);
  • even if Satoshi Nakamoto were to reveal his identity, his presence or absence would be indifferent to the functioning of the network;
  • it is estimated that thanks to the mining operation during the first year of life of the peer network, on the Bitcoin address owned by Satoshi Nakamoto there are about 980,000BTC (unspent transactions). Other sources speak of 750,000.

Satoshi Nakamoto, in the short message that came with the download link of the paper, lists the main properties of his fully peer-to-peer payment system, with no fiduciary third parties:

  • prevention of double spending thanks to a peer-to-peer network;
  • lack of confidence in the mint or in third parties;
  • participants may remain anonymous;
  • the new coins are created through the Hashcash proof of work system;
  • the proof of work for the generation of new coins tends to strengthen the network to prevent double spending.

The same concepts are reiterated in the part of the paper before the introduction:

  • the problem of electronic money transfer is brokering (with particular reference to financial institutions);
  • the solution is a peer-to-peer network, capable of solving the double spending problem, which prints a time marker on transactions by hashing them into a hash-based proof-of-work chain, forming a recording that cannot be edited without redoing the proof-of-work.

The introduction adds to these two elements, the problem and the solution, various aspects:

  • reversibility of transactions (problem);
  • transition costs (problem);
  • limitation of the minimum size of viable transactions and exclusion of the possibility of small occasional transactions (problem);
  • loss of ability to make irreversible payments for irreversible services (problem);
  • greater customer profiling by traders as a precautionary measure and as an indispensable basis for trust (problem);
  • percentage of fraud accepted as inevitable (problem);
  • electronic payment system based on cryptographic proof (solution);
  • allowing two counterparties to negotiate directly without the presence of a trusted third party (solution);
  • transactions that are computationally impractical to reverse (solution);
  • peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions (solution);
  • the system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes (solution).

These aspects allow us to understand what Bitcoin is: a protocol that generates a peer-to-peer network that allows each node that composes it to transact freely and pseudonymously value to other nodes in the network. This value, or more correctly, a digital representation of value, is generated by the protocol in order to guarantee scarcity, security in the order of transactions and security of the system itself.

Transactions take place through digital signatures, and this chain of digital signatures is Satoshi Nakamoto’s definition of electronic currency: “We define as electronic currency a chain of digital signatures“.

What is the difference? Before, an exchange foresaw the presence of a reality that in the same exchange managed, by becoming a guarantor, the data of the users, that is the balance of how much stuff you had: to transfer money one authenticated themselves at a central institution asking the transfer of the amount to another person. The central body and therefore the centralized system took away from the former to give to the latter.

In all this, the key role is that of the central body that: knows who you are and how much you give to whom; can handle your accounts and possibly block them; tends to ask you for cash (in the form of a percentage on the transaction, fixed costs of custody of your money, etc.); in the case of fiat currencies it is the issuer and controller so it can devalue, inflate and you name it.

Now, after the arrival of Bitcoin, an exchange involves sending information to the nodes of the network to take away an amount of “money” from your account to transfer it to another. The network nodes modify their register based on the information and update it.

This is Bitcoin: a system that allows direct exchanges (I don’t have to ask any authority for permission) and secure exchanges (no one can handle my money) using a shared register of all transactions.

 

Alessio Salvetti
Alessio Salvetti

Co-founder and board member (VP) of Bcademy, Alessio is also a partner and board member of Impact Hub Trentino, one of the 102 nodes of the worldwide network. After an experience as a professor of philosophy, he left teaching to coordinate a research team on the connection between neuroscience and economics. He then devoted himself to the actual creation of business. He's a business developer and consultant for many startups and passionate bitcoiner and expert in modelling and lean startup, he is a co-founder of Inbitcoin and responsible for the delivery of Bcademy products (CPO).

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