- 1. Bitcoin allowed to get rid of intermediaries
- 2. Fundamental bitcoin vulnerability
- 3. Why bitcoin can be trusted
- 5. As bitcoin continues to grow
- 6. Incentive to engage in bitcoin mining
- 7. How to cope with the growth of Bitcoin
- 8. The ability to conduct any transaction
- 9. Bitcoin privacy
- 10. Bitcoin protection mechanism
October 31 2008, someone under the pseudonym Satoshi Nakamoto published an article "Bitcoin: A Peer-to-Peer Electronic Cash System", in which he outlined the concept of bitcoin.
In honor of the anniversary, we remember the principles of the first cryptocurrency 10 and the way its creator described them.
1. Bitcoin allowed to get rid of intermediaries
"Internet commerce in most cases relies on financial institutions acting as trusted intermediaries ... What is needed is a payment system based on cryptography, not trust."
Defenders of cryptocurrency like to say that Bitcoin does not rely on any central authority, for example, a bank that can deceive the user's trust. For example, credit card companies allow buyers to cancel transactions in certain cases, due to which the seller cannot be sure of payment. Bitcoin removed intermediaries from this equation, making payments reliable and irreversible.
2. Fundamental bitcoin vulnerability
"The system is safe, while under the cumulative control of its honest participants there is more computing power than under the control of a group of criminals acting together."
In order to function properly, Bitcoin must be reliable enough to resist hackers trying to create a long chain of fake transactions that will overtake the true blockchain. This requires computational power, and this also contains a vulnerability that attackers can take advantage of at some point: if there are enough people who want to bring down bitcoin, they can threaten its integrity.
3. Why bitcoin can be trusted
"The addressee should know that none of the previous owners signed a transaction that is earlier than the one in the chain of the coin sent to him ... Let's start describing our solution from the timestamp server."
When using Bitcoin as a payment system, the biggest threat lies in double spending. When it comes to physical currency, double spending is not possible, since you have to transfer real money to the seller. The fundamental reliability of Bitcoin is based on the fact that everyone knows about all previous transactions, so it is impossible to dispute their priority.
4. Why the algorithm of Proof-of Work is so important
“Records created in this way cannot be changed without re-performing the entire amount of calculations. As new blocks are added to the chain, the work on changing this block will require redoing all subsequent blocks. ”
One of the reasons why Bitcoin turned out to be such a stable system is that it only becomes stronger over time and this strength is largely based on the Proof-of Work algorithm. The longer the block chain becomes, the more effort is required to successfully attack it. As the complexity of the Proof-of Work algorithm only increases over time, Bitcoin continues to strengthen its protection against hackers.
5. As bitcoin continues to grow
"Participants always consider the longest version of the chain to be true and work on extending it."
As Bitcoin became increasingly popular, the problem arose that not all Bitcoin network nodes always worked with the latest version of the blockchain. However, over time, subsequent transactions were added to the longest block chain, and the entire network was updated to this version.
6. Incentive to engage in bitcoin mining
“By default, the first transaction in the block is special, creating a new coin that belongs to the creator of the block. Such a scheme encourages honest members of the network, encouraging them to support the work of the network, and also decides on the initial distribution of the money supply in the absence of a central issuer. ”
Mining bitcoin has always been a very tempting activity, and as the price of bitcoin rises, huge computing resources began to be used to form new blocks and receive a small reward in bitcoins for this. As stated in Nakamoto's White Paper, mining also encourages users with huge computing power not to sabotage the system, but to play by the rules, since in this case they can earn more.
7. How to cope with the growth of Bitcoin
“As soon as the last transaction related to a token is buried under a large number of new blocks, all the transactions preceding it can be deleted to save disk space.”
As Bitcoin grew in popularity, the speed of the system slowed down, but the founders of Bitcoin foresaw this development and suggested cutting off unnecessary branches of the hash tree. This principle provides for the compression of old blocks by eliminating intermediate hashes, storage of which is unnecessary after a certain number of transactions. However, theoretically cutting a blockchain can cause more problems than specified in White Paper Nakamoto, since no one can guarantee that the block that is offered to compress will not have information vital for the functioning of the entire blockchain.
8. The ability to conduct any transaction
“Despite the fact that you can operate with individual tokens, creating a special transaction for each cent would be too inconvenient. In order to be able to add and separate tokens, transactions contain several inputs and outputs. ”
Ordinary currencies have currency units of different denominations, for example, coins in 1 euro or twenty-dollar bills. Bitcoin could theoretically also be structured this way. And yet it is more efficient to make transactions, the size of which varies in any direction. If we need to pay 4 dollars in cash, we will have to lay out 4 one-dollar bills, and the Bitcoin user has the opportunity to pay a “four-bitcoin bill” rather than forcing the blockchain to make 4 1 bitcoin transactions each.
9. Bitcoin privacy
“The information will be open that someone sent someone a certain amount, but without being tied to specific individuals. The same amount of data is disclosed on the stock exchanges that publish the time and volume of private transactions, without specifying who exactly they were made. ”
Confidentiality is a significant advantage that cryptocurrencies have over most other payment systems. Bitcoin was not such a confidential system, as it seemed to some users, which led to the emergence of competitors cryptocurrency, paying more attention to privacy issues. However, White Paper Nakamoto mentions additional protection measures that Bitcoin users can use, for example, creating different key pairs for each new transaction.
10. Bitcoin protection mechanism
“Nodes will never accept an incorrect transaction or a block containing it. The attacker can only try to change one of his transactions in order to get the money back. ”
In the last section, Nakamoto analyzes the hacker's chances to create an alternative blockchain. To succeed, he will have to work fast enough for his fake chain to be accepted by other participants. Otherwise, if the attacker gets ahead of the other nodes, his chances of changing the previous transaction will eventually be reduced to zero.