A look at Satoshi Nakamoto’s Bitcoin Whitepaper and how blockchain came to be

In October 2008, Satoshi Nakamoto—a pseudonym used by the developer or developers of bitcoin—published a whitepaper describing how an alternative electronic cash system could allow 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 overview of how key aspects of Bitcoin (BTC) could support a trustless electronic cash system using cryptographic proof.

The paper defines an electronic coin as a chain of digital signatures. It also outlines how ownership transfer can be performed 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 that is built in the process.

This is how the concept of blockchain came to be. In order for transactions to be added to a block, a timestamp server continuously sends hashes to the network of nodes, or computers, in the network.

Using the SHA-256 hash algorithm, each block can generate only 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 makes it impossible for any node to change any transaction in the blockchain, thus making it secure.

How the BTC Blockchain Network processes transactions

All new transactions are broadcast to nodes. Each node tries to find a hard 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 transferred, the nodes will work on both until 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 want, turning off and turning back on when they want to contribute to the network and add blocks to the bitcoin blockchain.

Stimulating computing power delivered with newly minted BTC

Nakamoto envisioned an incentive system for nodes to support the BTC network by distributing BTCs instead of computing power being contributed by them to keep the entire network free from double spending or being attacked by bad actors.

Thus, the first transaction in a block starts a new BTC owned by the creator of the block, and nodes continue to support the network 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 into focus the aspect of transaction fees acting as a more regular incentive.

Once a predetermined number of BTC enters circulation, transaction fees can make up the bulk of the incentive available to nodes and are considered to be completely inflation-free for additional targets.

As a result, any potential attacker will find it more profitable to use the extra computing power to mint more new coins and earn more transaction fee-based incentives, than to try to steal funds by modifying the blockchain with a new version of it.

Handle 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 simplify payment verification without running a full network node.

However, what set the BTC network apart from traditional banking channels 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 requiring a new key pair to be used for each transaction.

Although transactions are made public and trust is maintained by the network of nodes that confirm each block of transactions, the identity of users can be placed behind an impenetrable firewall by virtue of the changing key pairs used.

Using a framework of digital coins made of digital signatures and combining elements of cryptography, the BTC Whitepaper proposed a peer-to-peer transaction network that introduced a revolutionary new way of doing business. It’s secure, limitless and accessible to everyone.
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