Bitcoin: A Peer-to-Peer Electronic Cash System
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Today I will break down and explain the original Bitcoin paper in a clear manner. This post will not cover every aspect of Bitcoin, instead I will focus on the original Bitcoin paper and hopefully this will provide you with a fundamental understanding of Bitcoin. The paper that I will be discussing here is the original paper written by Satoshi Nakamoto, which first introduced the word to Bitcoin in Satoshi argues that buying and selling goods over the internet relies on financial institutions acting as 3rd parties to process financial transactions.
There is currently no way to make a non-reversible payment online for a non-reversible service as there is with cash in the physical world. Since the financial institutions are acting as a trusted party to facilitate the transaction, they often spend time resolving disputes and dealing with fraud. This therefore increases the cost of performing a transaction over the internet and makes transactions relatively expensive. To overcome this problem, Satoshi introduces an electronic payment system based on cryptography.
This will allow two parties to interact with each other without a 3rd party getting in the way. Since these cryptographic transactions will be computationally impossible to reverse, users will be protected from fraud.
A peer-to-peer a set of interconnected computers which work together electronic cash system will be created. This peer-to-peer cash system, avoids previous problems of double spending performing two transactions with one coin simultaneously by using Hashing and proof-of-work explained later.
During this process, the sender passing the Bitcoin onwards, electronically signs the pervious transactions of the Bitcoin and the public key of the recipient they are sending the Bicoin to. An analogy to this is signing for a package that you have received and then writing a forwarding address on the package before sending it onwards.
Passing the Bitcoin from one person to another is like playing a game of pass the parcel, except each time the parcel is passed, the history of the parcels locations is written on it. Unlike parcels in the real world, digital parcels can be sent to more than one recipient at the same time imagine sending the same email to multiple people.
Bitcoin a peertopeer electronic cash system summary overcomes this problem as time stamps are used to ensure that whenever a Bitcoin is passed on, a duplicate copy of that coin cannot be double spent fraud.
Each transaction is time stamped and processed by the Bitcoin system in order of their respective time stamp. Therefore, if a coin is sent to two recipients, the coins will have different time stamps and hence the second coin sent will be automatically rejected by the system. This ensures that the system, along with its users, moderate the chain of transactions blockchain to ensure fraudulent activity does not take place.
Using this method of moderating transactions ensures that a 3rd party is not needed and the Bitcoin system is truly decentralised. To avoid this, the majority of computers nodes in the network agree upon a singular timeline and process transactions relative to this time.
The timestamp server is a simple piece of software that is used to digitally timestamp data. The server takes a small section of the transaction data a hash and timestamps it.
This time stamped hash is then made publicly available for everyone to see. The existence of this time stamped hash therefore proves that the transaction exists and is therefore valid. This therefore creates a chain of transactions Blockchain as each new time stamped hash includes the previous hashes. The size of bitcoin a peertopeer electronic cash system summary Blockchain will therefore get larger as the transaction history increases. To implement a time stamp server across a network of computers nodesa proof-of-work system has to be used.
Proof-of-work requires proof that a specified amount work has been done by the system. In terms of Bitcoin, a specific mathematical problem has to be solved by a computer and its answer presented to show that it has done work. Since a computer has to do work to solve a problem, people cannot spam the system with multiple requests.
Spamming the system with multiple requests would require too much computer power and hence proof-of-work is used to safeguard the system. An analogy to this would be, a teacher giving a difficult homework assignment to a student. The teacher then checks the students answer and if the student is correct, this proves to the teacher that the student has done a sufficient amount of work to be rewarded.
This number also contains a puzzle that needs to bitcoin a peertopeer electronic cash system summary solved before a transaction can happen. When someone sends a transaction, they must therefore take this unique number and solve its puzzle. The bitcoin a peertopeer electronic cash system summary to the puzzle is then passed onto the next person recipient for the recipient to check. The recipient then checks the answer given to them by the sender, by plugging the answer into the hash that generated the random number.
The hash will then inform the receiver if the answer is correct. This process of solving hash puzzles essentially locks the transactions blocks in place within the Blockchain. To reverse a set of transactions unlock a blockthe work done to solve the hash puzzle would have to be undone. Therefore it is impractical to unlock a single block as the whole chain has to be changed to do this. Hence, this creates transactions that cannot be reversed. Nodes always consider the longest chain to be correct.
If two nodes send two versions of the block at the same time, these blocks will be processed based on their time stamp. The longest chain will win. If a node is switched off and subsequently does not receive a block, the rest of the nodes bitcoin a peertopeer electronic cash system summary continue without it and the node that missed out will be updated when it connects to the network at a later date. Conventionally, the first transaction in a block creates a new coin which is owned by the person node who created that particular block.
This incentivises people to use their computers nodes and connect to the Bitcoin network to help process Bitcoin transactions. This is where the term Bitcoin mining originates. Transaction fees also act as incentives, which are additional charges added to each transaction. Once the maximum amount of coins 21 Million have entered the Bitcoin system, the incentive to keep mining Bitcoins solely comes in the form of transaction fees, which are inflation free.
It is hoped that these incentives will keep the nodes honest literally and stop them resorting to fraud to make a profit. If fraudulent users have more nodes than honest users, they can undo the block chain, steal payments and generate new coins. Old transactions can be discarded after a set amount of time to save disk space, the root a trace of the discarded transaction will remain so the Blockchain remains bitcoin a peertopeer electronic cash system summary.
Payments can be verified without running the full network on a node. This is done by querying the network of nodes and matching a transaction to its time-stamp.
The transaction cannot be checked by an individual node, a person must connect to another node which connects them to the Blockchain. This method of bitcoin a peertopeer electronic cash system summary when making a payment is reliable as long as honest nodes are in control, however this verification method becomes venerable if fraudulent nodes take over the network. To overcome this, an alert should be sent from nodes that detect an invalid block, informing other nodes to download a copy of the full Blockchain to confirm invalid blocks.
Businesses should run their own nodes for increased security. Processing coins individually is possible, however it is inefficient to make a bitcoin a peertopeer electronic cash system summary transaction for ever cent in a transfer.
This allows a large coin to be split into multiple parts before being passed on, or smaller coins to be combined and make a larger amount. A maximum of 2 outputs from each bitcoin a peertopeer electronic cash system summary can be made, one going to the recipient and another returning change if any to the sender.
Although bitcoin a peertopeer electronic cash system summary are publicly declared, the public keys that identify individuals are anonymous, and hence the identities of the sender and receiver cannot be determined by the public. It is publicly declared that an amount of money is moving from point A to B, however no identifiable information is openly distributed. These calculations require a somewhat advanced understanding of mathematics which can take a long time to explain in a simplified manner.
I will not go into this detail here, however, if enough people request this, I will make a new post explaining this section in detail. There is a higher probability that an honest node will find a block before a fraudulent node.
It is therefore unlikely that the fraudulent node will catch up with the honest node when making a fraudulent Blockchain. The odds are not in the favour of the fraudulent node unless they simply get lucky. This is important when increasing the size of the Blockchain as the nodes identify the longest Blockchain as being the correct chain. A peer-to-peer network using proof-of-work is used to create a public log which is impractical for attackers to change, provided honest nodes are in control of the system.
Nodes work with little coordination, they do not need to be identified since messages are not ever sent to a sole location. Nodes can leave and rejoin the network at any time, provided they update their Blockchain upon re-entering the network. Hi britcoinI'm glad you liked this article! It was fun to write and I'm glad its helped people understand Bitcoin a lot more. Thanks for sharing, its much appreciated! A very well explained breakdown.
Thank you quicksilverthe plan is to get more people into crypto so i'm glad this will help: I had to sign up for steemit account to be able to thank you for this great post. Will look forward to see similar posts by you. Bitcoin White Paper explained An example of this: In brief, this section mathematically states: A system for electronic transactions without relying bitcoin a peertopeer electronic cash system summary 3rd party trust has been proposed.
Digital signatures provide strong controls over ownership and double-spending is bitcoin a peertopeer electronic cash system summary. Rules and incentives can be enforced using a voting system. Thank you for reading this post! Please upvote, comment and follow dr-physics for more content!
Authors get paid when people like you upvote their post. I'm glad you liked it: Wow great info will help a lot am posting on Facebook linked and twitter great stuff. Thanks for this brilliant explanation, now i understand better. Your welcome, really glad it helped! Could you please make a new post explaining calculation section in detail. Liked it a lot .
