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Before Bitcoin became the first cryptocurrency, it was just an idea outlined in a white paper by an author who went by the pen name of Satoshi Nakamoto. Nakamoto’s vision was of a decentralized digital currency that would address the shortcomings of electronic payment systems of that time, in 2008.
See: 5 Things You Must Do When Your Savings Reach $50,000
White papers are one way for beginning investors to learn more about different cryptocurrencies. Since Nakamoto’s Bitcoin white paper, more than 3,000 white papers about various cryptocurrencies have been written, including papers on Ethereum, Litecoin, Cardano and many other well-known and less popular altcoins.
Let’s take a look at the white paper that started it all: “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto.
What Is the Bitcoin White Paper?
The Bitcoin white paper is a nine-page paper with 12 sections plus an abstract that details a new kind of digital currency or online payment system. At the time the paper was written, Bitcoin did not exist. It was only a year later that the paper’s anonymous author, whose identity is not known to this day, launched Bitcoin. By July 2010, Bitcoin had risen from its launch price of $0 to 9 cents, and in April 2011, it broke $1.
“The unit of value (BTC) wouldn’t have been possible without blockchain technology, but there was never a bitcoin blockchain without the currency either,” Robert Konsdorf, CEO of NFT management platform Facings, told NextAdvisor.
That quote explains the significance of Nakamoto’s white paper. Without the white paper describing how blockchain technology could be used to create an entirely new kind of technology, Bitcoin would not exist.
Why Was Satoshi Nakamoto’s White Paper So Important?
Nakamoto’s white paper represented the initial thought behind a new kind of technology. The white paper broke down the failings in current electronic payment systems and described how bitcoin would work.
Moving forward, most cryptocurrencies today launch with a white paper that is written to demonstrate the crypto’s value to investors. Some altcoins launch with an explainer video instead, but that video serves the same purpose as Nakamoto’s white paper did years ago — to explain the technology, purpose and value of the cryptocurrency.
What Happened to the Bitcoin White Paper?
In 2008, the Bitcoin whitepaper was published under an MIT public license. That means it should be free for everyone to access and read. Because of this licensing agreement, you can find the original paper published online in a number of places, including Bitcoin.org. You can also find PDFs published by multiple organizations, including CoinDesk and USSC.gov, which is the website of the United States Sentencing Commission.
How Long Is Bitcoin’s White Paper?
For such a significant document, the Bitcoin white paper isn’t exceptionally long. It is just nine pages. It includes an abstract and 12 parts.
Let’s review the parts so you can understand Bitcoin better.
Nakamoto’s white paper, as many college and scientific papers do, began with an abstract that describes the concepts of Bitcoin and blockchain. Nakamoto wrote, “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.”
The abstract described blockchain technology, where network timestamp transactions create an ongoing chain of proof-of-work. The record cannot be changed without redoing the proof-of-work, and that creates security on the network.
The next part of Nakamoto’s paper introduces some of the problems with peer-to-peer payment services of the time, such as PayPal, which required third-party validation. The issue with such systems is that disputes could arise and financial institutions must mediate these disputes.
“Completely non-reversible transactions are not really possible,” Nakamoto wrote. Additionally, financial institutions must act as intermediaries, which means there must be added transaction costs for those using the services. These payment systems are based on trust, not on solid proof like blockchain technology.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party,” Nakamoto wrote, setting the stage for blockchain’s proof-of-work protocol and, ultimately, Bitcoin as a form of payment.
The rest of the sections of the paper describe the blockchain technology, step by step, including some of the code and calculations. Keep reading as we describe these sections, and their significance, in the simplest terms possible.
Keep in mind that the basics of blockchain gave rise to an entire decentralized financial industry that includes Bitcoin, altcoins and NFTs today. Understanding the technology can help you analyze investments and their future potential. However, it’s still important to understand that any crypto investments are highly speculative. Never invest more than you are willing to lose. And be sure to keep substantial investments safe in a cold wallet for storage.
The second part of the paper describes how transactions are executed. As with other P2P payment methods, transactions are executed by digital signatures. However, in the case of PayPal and other digital transactions, a third-party payee must verify the signatures to ensure that the owner didn’t double-spend the coin.
Using blockchain technology, all transactions are publicly announced on the network. Only the earliest transaction counts and the majority of nodes in the chain must agree it was the first transaction.
3. Timestamp Server
Verifying the time of transactions occurs through the timestamp server, which is described in part three of the Bitcoin whitepaper. The timestamp server takes a hash of a block of items, and publishes the hash, proving that the data existed at that time. Each timestamp reinforces the ones before it, creating a chain.
In part four of the paper, Nakamoto introduces the crucial proof-of-work consensus mechanism. Nakamoto mentioned that simply publishing the transaction to a newspaper or Usenet posts would not work. Instead, the blockchain would draw on technology similar to Adam Back’s Hashcash (footnoted in the white paper). Hashcash is often used as a denial-of-service countermeasure, and it was introduced by Back in 2002.
Although the white paper doesn’t mention it, the proof-of-work consensus mechanism is where Bitcoin miners come in. Once a CPU expends the energy to satisfy the proof-of-work requirement, the block can’t be changed. The majority decision will be represented by the longest chain. As long as a majority of CPU power is controlled by honest nodes — not attackers — it will be virtually impossible for an attacker to work fast enough to redo the prior proof-of-work in a chain and catch up to the honest nodes. That’s where the enhanced security of blockchain technology comes from.
In the next section, Nakamoto describes what is required to run the blockchain network. In this section, Nakamoto also describes what would occur if a fork is created in the chain — which has happened in the history of Bitcoin. Nodes will always consider the longest chain to be the correct one. But if two nodes broadcast simultaneously, which can occur, a fork will be created. In most cases, the fork will be rectified as soon as the next miner comes along and adds another node. The longer chain will become the correct chain again. These kinds of forks are created all the time on blockchains and receive little notice.
Occasionally, a second fork will be created and miners continue adding nodes to both chains. When this occurs, a second blockchain is formed. That occurred when Bitcoin Cash was introduced. It is the most famous Bitcoin hard fork, creating an entirely new cryptocurrency.
The next part of Nakamoto’s paper describes the process of earning coins through mining, and, in fact, Nakamoto uses a gold mining analogy. This section explains the incentives offered for creating new blocks. The first transaction in a block releases a coin, which is the reward to the node (and the miner operating the node) for creating the block.
“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended,” the paper says.
These incentives discourage bad actors. If someone is able to assemble more CPU power than honest nodes, he can use that power to defraud people or use it to generate new coins. “He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth,” Nakamoto wrote.
7. Reclaiming Disk Space
Part seven of the paper describes how old blocks can be deleted to save disk space without breaking the block’s hash. This is accomplished through something called a Merkle Tree, where only the root for each block is stored to save space.
8. Simplified Payment Verification
This section of the paper describes how payments are verified without having to run a full network node. A user can verify that a transaction was part of the longest chain by reviewing the Merkle branch. Verification is reliable as long as honest nodes control the network. And as long as honest nodes can overpower attackers, this should be the case.
However, businesses that receive frequent payments should also have the option to run their own nodes for verification.
9. Combining and Splitting Value
Transactions can contain multiple inputs and outputs, rather than creating a separate transaction for every coin in a payment. This helps keep operations streamlined. Multiple inputs can be combined for smaller transactions. Typically, there will only be two outputs: one for the payment and one for any change that should be returned to the sender, according to Nakamoto.
In any P2P payment system, privacy is a key concern. In transactions that are verified by third-party payment processors like PayPal, the payee, the payer and the third party will all know about the transaction. The processor or bank maintains privacy by limiting access to the information.
When people use Bitcoin as a form of payment, transactions must be announced publicly for verification on the blockchain. However, public keys can be anonymous. Transactions are not linked to an individual. This maintains privacy since absolutely no one other than the payee and payer — not even a third party or those verifying the transactions — knows who sent or received the coins.
To further maintain privacy, a new key pair should be created for each transaction to avoid linking a series of transactions to each other.
With the basics of blockchain technology and Bitcoin explained, section 11 of the white paper shares the calculations that show the security of the blockchain. Even if an attacker is able to generate a chain faster than miners can generate honest nodes, the calculations show that the probability that the attacker ever catches up with the honest chain is less than 0.001% and continues to drop off exponentially.
The paper ends with a conclusion that reiterates the importance of electronic transactions that do not require intermediaries or rely on a system of trust.
Rather, Bitcoin’s proof-of-work consensus mechanism records a public history of transactions that is “computationally impractical for an attacker to change,” according to the white paper. That makes the blockchain secure and, the paper says, “robust in its unstructured simplicity.”
Of course, the proof-of-work consensus mechanism is not without its own shortcomings, including the energy use required to maintain and run the blockchain. Other cryptocurrencies, including Ethereum, later introduced the proof-of-stake consensus mechanism. But Bitcoin remains as the cryptocurrency that started it all, and the white paper is an important historical and technical document detailing this currency.
“Bitcoin: A Peer-to-Peer Electronic Cash System” is widely available on the internet today. It provides insights into how Bitcoin and other proof-of-work cryptocurrencies and NFTs work, which can be interesting to investors, miners and anyone who has ever used — or wants to begin using — cryptocurrency as an investment or a form of online payment.
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