The Breakdown - The Bitcoin Whitepaper by Satoshi Nakamoto

Episode Date: January 24, 2021

For this week’s Long Reads Sunday, NLW reads the document that started it all - the Bitcoin White Paper. Interestingly, this document was released under an MIT open-source license, available free to all. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 24th, and that means it's time for Long Reads Sunday. Before we start today's Long Reads Sunday, however, I want to take you back to 1991. In that year, a man named Phil Zimmerman created the first version of something that he called Pretty Good Privacy, or PGP. PGP was a type of encryption, and Phil's motivation had been that as a longtime anti-nuclear

activist, people like him could securely use bulletin board systems as well as store important messages and files. When PGP was released, it was with no license fee for non-commercial use, and the complete source code was included with all copies. This quickly found its way onto the internet with some interesting consequences. In February of 1993, Zimmerman became the target of a criminal investigation by the U.S. government for exporting munitions without a license. This sort of encryption was at the time considered munitions,

and the penalties for this sort of export were, as you might imagine, pretty big. This began what became known as the Crypto Wars, a series of battles throughout the 1990s where cypherpunks and their allies fought to keep this sort of privacy technology easily available. The way they took on this particular set of regulations was pretty original. Zimmerman published the entire source code of PGP in a hardcover book via MIT Press. This was distributed and sold widely, and basically anyone with the book then had the code. The point was that while the export of munitions like guns and bombs was restricted,

the export of books is protected by the First Amendment. They took this code as speech idea and ran with it, printing the source. source code on t-shirts and even some people tattooing parts of it on their bodies. Those battles around privacy set the tone for much of what has come since, and it seems likely that we're in for more of that in the future when it comes to this sort of privacy technology. I was reminded of all this earlier this week when a certain someone who shall remain nameless, for the sake of denying his petty schemes, the oxygen they so richly desire, decided to try and sue two websites where the Bitcoin white paper was published to take it down, claiming that it was his.

This is not the first time said person has done this, and it is just as absurd now as it was then. The white paper was published under an open-source MIT license allowing anyone to, quote, use, copy, modify, merge, publish, distribute, sub-license, and or sell copies of. And in that spirit, I thought, what better choice for this week's Long Read Sunday than the very work itself? Here it is, preserved and shared in one more place, this time in my voice. Bitcoin, a peer-to-peer electronic cash system by Satoshi Nakamoto. Abstract. 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.

Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof of work, forming a record that cannot be changed without redoing the proof of the proof of the sequence of witness, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers.

The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof of work chain as proof of what happened while they were gone. Introduction. Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum

practical transaction size and cutting off the possibility for small casual transactions. And there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communication channel without a trusted party. 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. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double spending problem, using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. 2. Transactions We define an electronic coin as a chain of digital signatures. Each owner transfers the coin

to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership. The problem, of course, is that the payee can't verify that one of the owners did not double spend the coin. A common solution is to introduce a trusted central authority, or mint, that checks every transaction for double spending. After each transaction, the coin must be returned to the mint to issue a new coin, and only coins issued directly from the mint are trusted not to be double spent. The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them,

just like a bank. We need a way for the payee to know that the previous owners did not sign any earlier transactions. For our purposes, the earliest transaction is the one that counts, so we don't care about later attempts to double spend. The only way to confirm the absence of a transaction is to be aware of all transactions. In the mint-based model, the mint was aware of all transactions and decided which arrived first. To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received. The payee needs proof that at the time of each transaction, the majority of nodes agreed it was the first received.

3. Timestamp Server. The solution we proposed begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or Usenet Post. The timestamp provides that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it. For Proof of Work. To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back's hash cache, rather than newspaper or usenet posts.

The proof of work involves scanning for a value that when hash, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash. For our timestamp network, we implement the proof of work by incrementing a nonce in the block until a value is found that gives the blocks hash the required zero bits. Once the CPU effort has been expended to make it satisfy the proof of work, the block can not be changed without redoing the work. As later blocks are chained after it, the work to change the

block would include redoing all the blocks after it. The proof of work also solves the problem of determining representation in majority decision-making. If the majority were based on one IP address, one vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a pass block, an attacker would have to redo the proof of work of the block, and all blocks after it, and then catch up with and surpass the work of the honest nodes. We will show later that the probability

of a slower attacker catching up diminishes exponentially as subsequent blocks are added. To compensate for increasing hardware speed and varying interest in running nodes over time, the proof of work difficulty is determined by a moving average targeting the average number of blocks per hour. If they're generated too fast, the difficulty increases. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid

out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. 5. Network. The steps to run the network are as follows. One, new transactions are broadcast to all nodes. Two, each node collects new transactions into a block. Three, each node works on finding a difficult proof of work for its block. Four, when a node finds a proof of work, it broadcasts the block to all nodes. Five, nodes accept the block only if all transactions in it are valid. and not already spent. Six, nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash. Nodes always consider the longest chain to be the correct one, and will keep working on extending

it. If two nodes broadcast different versions of the next block simultaneously, some nodes may receive one or the other first. In that case, they will work on the first one they received, but save the other branch in case it becomes longer. The tie will be broken when the next proof of work is found, and one branch becomes longer. The nodes that were working on the other branch will then switch to the longer one. New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach many nodes, they will get into a block before long. Block broadcasts are also tolerant of dropped messages.

If a node does not receive a block, it will request it when it receives the next block and realizes it missed one. 6. Incentive By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant 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 incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation-free. The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments

or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favor him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth. 7. Reclaiming disk space. Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the blocks hash, transactions are hashed in a Merkel tree, with only the root included in the blocks hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do not need to be stored. A block header with no transactions

would be about 80 bytes. If we suppose blocks are generated every 10 minutes, 80 bytes times 6 times 24 times 365 equals 4.2 megabytes per year. With computer systems typically selling with 2 gigabytes of RAM as of 2008, and Moore's Law predicting current growth of 1.2 gigabytes per year, storage should not be a problem even if the blockheaders must be kept in memory. Eight, simplified payment verification. It is possible to verify payments without running a full network node. A user only needs to keep a copy of the block headers of the longest proof of work chain, which he can get by querying network nodes until he's convinced he has the longest chain, and obtain the Merkel branch linking the transaction to the block it's timestamped in. He can't check the transaction for himself, but by linking

it to a place in the chain, he can see that a network node has accepted it, and blocks added after it further confirm the network has accepted it. As such, the verification is reliable as long as honest nodes control the network, but is more vulnerable if the network is overpowered by an attacker. While network nodes can verify transactions for themselves, the simplified method can be fooled by an attackers fabricated transactions for as long as the attacker can continue to overpower the network. One strategy to protect against this would be to accept alerts from network nodes when they detected an invalid block, prompting the user's software to download the full block and alerted transactions to confirm the inconsistency. Businesses that receive frequent payments will

probably still want to run their own nodes for more independent security and quicker verification. 9. Combining and splitting value. Although it would be possible to handle coins individually, it would be unwieldy to make a separate transaction for every cent in a transfer. To allow value to be split and combined, transactions contain multiple inputs and outputs. Normally there will be either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and at most two outputs, one for the payment and one returning the change, if any, back to the sender. It should be noted that fan out where a transaction depends on several transactions, and those transactions depend on many more, is not a problem here. There is never the need to extract a completely

stand-alone copy of a transaction's history. 10. Privacy. The traditional banking model achieves a level of privacy by limiting access to information to the parties involved in the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place, by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone. This is similar to the level of information released by stock exchanges, where the time and size of individual trades, the tape, is made public but without telling who the parties were. As an additional firewall, a new key pair should be used for each

transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of the key is revealed, linking could reveal other transactions that belong to the same owner. 11. Calculations. We consider the scenario of an attacker trying to generate an alternate chain faster than the honest chain. Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air, or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change

one of his own transactions to take back money he recently spent. The race between the honest chain and an attacker chain can be characterized as a binomial random walk. The success event is the honest chain being extended by one block, increasing its lead by plus one. And the failure event is the attacker's chain being extended by one block, reducing the gap by minus one. The probability drops exponentially as the number of blocks the attacker has to catch up with increases. With the odds against him, if he doesn't make a lucky lunge forward early on, his chances become vanishingly small as he falls further behind. We now consider how long the recipient of a new transaction needs to wait before being sufficiently certain the sender can't change the transaction. We assume the sender is an

attacker who wants to make the recipient believe he paid him for a while, then switch it to pay back to himself after some time has passed. The receiver will be alerted when that happens, but the sender hopes it will be too late. The receiver generates a new key pair and gives the public key to the sender shortly before signing. This prevents the sender from preparing a chain of blocks ahead of time by working on it continuously until he is lucky enough to get far enough ahead than executing the transaction at that moment. Once the transaction is sent, the dishonest sender starts working in secret on a parallel chain containing an alternative version of his transaction. At this point, Satoshi goes full math, so you're going to have to look at the actual white paper itself,

which someone's probably tattooing on their body right now to follow this next part, but we're going to go to the next section. 12. Conclusion. We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double spending. To solve this, we proposed a peer-to-peer network using proof of work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified since messages

are not routed to any particular place and only need to be delivered on a best effort basis. Notes can leave and rejoin the network at will, accepting the proof of work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them, and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.