Bitcoin- The Future

Bitcoin is a peer-to-peer electronic cash system that allows two unknown parties to transact online without needing a centralised intermediary; a digital currency that offers an alternative financial system free from central control.

Double-Spend Problem

Digital objects are easy to replicate. Consider a file that can quickly be copied. However, costless duplication is not desirable in money. The double spend problem addresses the issue of a receiver being certain that the digital currency they received was not simultaneously sent to someone else. This is unique to virtual currencies; it is impossible to double spend physical cash. The equivalent is counterfeit money which leads to inflation and devalues the currency and the trust in said currency.

The solutions to the double spend problem are either introducing a third party to act as a mediator and verify each transaction or using a decentralised ledger, ensuring every member has a full record of all transactions. Therefore participants can confirm that no coin was spent twice.

Abstract

Bitcoin solves the double spend problem through a distributed ledger. Alternatively titled a peer-to-peer network. Bitcoin solves this problem by implementing a chain of transactions, all of which rely on hash-based proof of work from the prior block, forming a sequence that cannot be changed without redoing the proof of work for every prior block.

The longest chain serves as proof of the sequence of events and the largest pool of CPU power. Bitcoin predicates itself on the belief that the majority of CPU power is controlled by good nodes, and not nodes cooperating to attack the network. With the assumption that good nodes will always generate the longest chain and stay ahead of misbehaving nodes.

The network requires minimal structure. Messages or transactions are broadcast on a best effort basis. Nodes can leave and rejoin at will because of the blockchain record. Simply accepting the longest proof of work chain as proof of what happened whilst they were absent.

Introduction

Prior to Bitcoin, no method existed to engage in transactions online without a trusted third party. Online commerce relied exclusively on financial institutions to process and mediate electronic payments.

These very same financial institutions crashed the economy in 2008 with reckless, unchecked behaviour. Bitcoin is, at its core, a response to the trust crisis caused by this economic event and an alternative financial system for people who want greater control and autonomy over their money.

The traditional internet commerce model:

John: Buyer
Sarah: Seller
Philip: Intermediary

John wants to buy something from Sarah. His order is sent to the payment processor, who sends it to Philip. Philip inspects the transaction, verifies it, and authorises the payment. Sarah gets her money, and John’s item is on its way.

Philip takes a fee, and this transaction is a reversible payment. And this naturally increases the need for trust. The need for a mediator grows if payments can be disputed/ reversed. This is a trust-based model. John trusts Philip instead of Sarah. John must provide personal data to Philip so that he can prove who he is; the same goes for Sarah. Collecting personal data is a necessary part of the trust-based model so intermediaries can identify and verify their customers.

Bitcoin allows John to buy something from Sarah without the need for Philip. This is why Bitcoin is referred to as a trustless financial system. It facilitates payment between two unknown parties without a trusted third party, instead introducing a cryptographic proof of trust.

This is Bitcoin’s value proposition. By providing a distributed ledger- an open record of every transaction- with each subsequent proof of work relying on the prior block, every single participant can view the record of all transactions and thus determine their validity. Instead of a centralised authority, Bitcoin uses computational proof.

Photo by Milad Fakurian on Unsplash

Technical Overview

Transactions

Two important concepts: Public key and Private Key.

Digital assets are stored on the blockchain and intangible.

Public keys are the addresses of wallets observable by anyone.

Private keys represent the code/ signature that proves ownership of the assets and allows them to be spent/ utilised.

Imagine an enormous building made of glass, containing thousands of boxes also made of glass. Everyone can look into the boxes and see their contents, but only those with the private key can open the boxes and interact with the contents. This is the blockchain. Digital assets are not stored in wallets; wallets are an access point to the blockchain containing the user’s private key.

https://bitcoin.org/bitcoin.pdf

Coins are moved from one owner to another through the use of digital signatures. All transactions are publicly announced to ensure that a coin has not been double spent (that the previous owner did not sign any prior transactions). In this manner, participants can agree on a single history. To confirm the absence of a transaction the network shares all transactions. Bitcoin introduces a timestamp to prove that the majority of nodes agreed it was the first transaction received.

The alternative is a centralised authority which checks every transaction. However, this puts the entire system in the hands of a single entity. Being responsible for the whole monetary system as payments cannot be made without them.

Timestamp

The timestamp proves the existence of the data at a specific time, allowing it to enter the hash. Each timestamp includes the previous time in its hash, with each additional timestamp reinforcing the one before it. This forms a chain of blocks. This is the blockchain.

A block on the blockchain consists of data, the hash of the block, and the hash of the previous block.

Data: The sender, the receiver, and the number of coins moved

Hash: The hash identifies a block and all its contents. A hash is essentially a fingerprint. It is unique and is calculated when the block is created. As the hash is calculated using the data and previous hash, any change to the block would result in a change of the hash.

Hash functions are used to generate fixed length output data that acts as a shortened reference to the original data. Solving the hash function creates a block and earns a reward (Bitcoin Mining). When the hash is solved, all the new transactions are locked into the block and added to the permanent record of all prior transactions.

The inputs for the hash function are all of the most recent, not yet confirmed transactions, timestamp, and reference to the prior block.

Proof of Work

Bitcoin employs the Proof of Work consensus mechanism. Through this method, the network validates transactions and broadcasts new blocks to the blockchain. It protects the network from denial of service attacks and other service abuses such as spam by requiring a processing time from a computer or requiring work from the service user.

Miners looking to earn the block reward compete against each other by solving complex computational puzzles. These miners compute hashes using ASIC (Application-Specific Integrated Circuit) miners. Hashing means plugging an input into a mathematical function and producing an output. Bitcoin uses the SHA-256 Hash Function. If the computed hash meets specified criteria, then the miner who proposed the solution wins.

When the solution is found, the miner broadcasts the block to the network and the other miners will then verify the solution. Hashes are difficult to solve but easy to verify. Each validated block contains a blockhash that represents the work done by the miner, hence the name Proof of Work.

The Proof of Work consensus algorithm protects the Bitcoin network against attacks because a successful attack would require an attacker to complete the proof-of-work for each prior block before adding a malicious transaction and the incurred cost would vastly outweigh the potential reward of attacking the network.

Photo by GuerrillaBuzz Crypto PR on Unsplash

Philosophical Overview

‘‘Do not underestimate where this is going.’’ Andreas Antonopoulos

Bitcoin represents the first monetary system that is not controlled by any single entity and totally decentralised. It is the greatest innovation in money which remains the most ancient technology at the heart of human civilisation. Its permissionless nature invites an explosion of innovation, and this network unites the various systems of money.

Bitcoin launched on January 3rd 2009. It separates the concept of money from nations, sovereign issuers, and institutions replacing it with network-based money. Bitcoin allows users to become their own bank, have full autonomy over their money, and control their future.

Bitcoin is the currency of the future.