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Bitcoin’s white paper: A guide

This article, which is now referred to as the Bitcoin Whitepaper, was first released in October 2008 by Satoshi Nakamoto and included important information about how Bitcoin (BTC) may enable a trust-less electronic payment system by utilising cryptographic evidence.

August 05, 2022 / 05:42 PM IST
Representational image

Representational image

The origins of cryptocurrency lie in a 14-year-old document written by a person whose identity has not been established. A white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” describes how an alternative electronic cash system can allow payments to be sent directly from one party to another, without involving trusted parties like a financial institution.

Previously, there was no mechanism that allowed making payments over a communications channel without a trusted third party like a financial institution in existence.

This article, which is now referred to as the Bitcoin Whitepaper, was first released in October 2008 by Satoshi Nakamoto and included important information about how Bitcoin (BTC) may enable a trust-less electronic payment system by utilising cryptographic evidence.

Use of a proof-of-work mechanism to implement a distributed timestamp server

The white paper explains how ownership transfer may be carried out by utilising the previous owner’s public and private keys to form a digital signature that is coupled with the next owner’s public key into a transaction block.

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It defines electronic currency as a chain of digital signatures. A hash is used to connect each block to the one before it, and the complete chain of blocks makes up the decentralised ledger that is being constructed. For transactions to be added to a block, a timestamp server continually broadcasts hashes across the network of nodes, or computers, in the network.

This is how the word “blockchain” began to be used.

Each block can only produce one hash when using the SHA-256 hashing method, a patented function that is 256 bits long.

The Bitcoin network utilises this procedure to determine the amount of difficulty such that a new block is mined once every 10 minutes.

The blockchain is secured via the proof-of-work (PoW) protocol, which renders it impossible for any node to modify any transaction.

How transactions would be handled by the Bitcoin blockchain network

Each node searches for a challenging PoW to fit the new transaction into a block as soon as any new transaction is broadcast to all nodes.

When a node discovers a PoW, it broadcasts the block to all other nodes, and those nodes only accept the block if all the transactions it contains are legitimate.

This is demonstrated by nodes utilising the hash of the approved block to create the subsequent block in the chain.

If there are two versions of the blockchain being broadcast, nodes will operate on both until one is longer and becomes the approved version since nodes believe the longest chain to be the right one.

This approach eliminates the need for fresh transaction broadcasts to reach all nodes because they will ultimately be processed into a block and made available for use by all nodes.

As a result, nodes can contribute as much processing power as they like, turning on and off as needed to support the network and add blocks to the Bitcoin blockchain.

Rewarding computer processing power with freshly created Bitcoins

In order to encourage nodes to maintain the Bitcoin network, Nakamoto devised a scheme in which they would get BTCs in exchange for the computational power they provided to prevent double-spending or malicious attacks on the whole network.

As a result, the first transaction in a block initiates the creation of a new Bitcoin that is held by the block’s author, and nodes continue to assist the network to create more BTCs.

The computer power required to mine a new Bitcoin, however, rises noticeably as the total number of BTCs in circulation does, bringing into sharper relief the feature of transaction fees that serves as a more regular incentive.

Transaction fees, which are regarded to be totally inflation-free for enhanced security, can make up the majority of the incentives available for nodes after a certain amount of Bitcoins are in circulation.

Therefore, any potential attacker would find it more beneficial to use the extra computational power to create more new currencies and profit from increased transaction fee-based incentives rather than attempting to steal money by changing the blockchain with a new version of it.

Using a novel privacy model to safely manage numerous transactions

The white paper also describes how transactions may be hashed in a Merkle treea data structure used in computer science and cryptographyto conserve disc space and speed up payment verification without requiring a complete network node to be active.

Even though all transactions are broadcast to the public blockchain, the secrecy offered by the Bitcoin network sets it apart from conventional financial channels.

This is accomplished by keeping the public keys secret and requiring the use of a different key pair for each transaction. By using shifting key pairs, the identities of its users may be hidden behind an unbreakable firewall even when transactions are made public and confidence is upheld by the network of nodes confirming every block of transactions.

Thus, the Bitcoin White Paper proposed a peer-to-peer transaction network that introduced a revolutionary new way of transacting that was also secure, borderless, and available to all.

It did this by using a framework of digital coins made from digital signatures and combining elements of cryptography.
Murtuza Merchant is a senior journalist and an avid follower of blockchain and cryptocurrencies.
first published: Aug 5, 2022 05:42 pm
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