A Glimpse at Satoshi Nakamoto’s Whitepaper on Bitcoin—10 years down the line
Like the fickle language of fashion, investors change their minds from time to time looking for trending get-rich-quick investment opportunities. The same euphoria drew countless investors to Bitcoin in 2017 when the price of the pioneer cryptocurrency soared and hit an all-time high of nearly $20,000. However, the massive drop in Bitcoin’s value witnessed in 2018 has caused many investors to retract and review their investment strategies.
Bitcoin (BTC) Price Today – BTC / USD
So far, Bitcoin has lost a big chunk of its value, currently trading at slightly above $6000. However, even amidst the declines and the volatility that is part of the crypto space, bitcoin left a global mark judging from the huge gains it received in 2017 and the overall interest it drew from both investors and advocates of the blockchain technology worldwide.
This article looks back into Satoshi Nakamoto’s whitepaper on bitcoin, a decade later. The following are ten bitcoin highlights from the document that every crypto investor needs to know.
Bitcoin removed intermediaries
“Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties….What is needed is an electronic payment system based on cryptographic proof instead of trust.”
Crypto enthusiasts and advocates love bitcoin’s power of independence. The cryptocurrency operates efficiently with no third party involvement such as banks or financial institutions. By removing intermediaries, bitcoin facilitates direct, peer-to-peer transactions that are reliable, permanent, and irrevocable.
Bitcoin is fundamentally vulnerable
“The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”
Bitcoin needs to remain resistant to fraud or hacking attempts that can ruin the true essence of the blockchain. Bitcoin implements such a hack-proof system through computing power that enables it to identify what could be the biggest threat to the cryptocurrency—people trying to displace its dominance and ruin its integrity in the crypto space.
The source of trust in bitcoin
“We need a way for the payee to know that the previous owners did not sign any earlier transactions….The solution we promise begins with a timestamp server.”
Double spending is the biggest threat to bitcoin as a payment system. With fiat money, double spending is rare and nearly impossible, as the buyer has to hand over the currency to the seller. Bitcoin’s basis for trust arises from the decentralization that it embraces. Every user can monitor the previous transaction, which enables them to trust what came before.
Bitcoin embraces proof-of-work
“Once the CPU effort has been expended to make it satisfy the proof-of-work, the block cannot 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.”
Bitcoin embraces the proof-of-work protocol, which has made it resilient over time. With an increasing blockchain, no effort to attack it has succeeded. The proof-of-work increases with time and bitcoin has been able to improve its defenses.
Bitcoin keeps growing
“Nodes always consider the longest chain to be the correct one and will keep working on extending it.”
Even amidst its growing popularity, bitcoin still faces issues, one of which is that not all the nodes in its network contain the latest version of blockchain. However, the network plans to spread all its subsequent transactions in future to allow the full network to catch up.
The reason to mine bitcoin
“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.”
Bitcoin mining comes with its incentive to the miners. While the price of the cryptocurrency soared, huge amounts of computing power have to go into mining new blocks even at the lowest level. However, the paper notes that those with huge computing power can simply mine new blocks of bitcoin without subverting the blockchain.
Managing the growing blockchain
“Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space.”
With the rising popularity of bitcoin, the process of mining it has gradually become slower. However, the founders of the cryptocurrency looked forward to pruning the growing blockchain. The method of doing this involves squeezing older blocks with sufficient shorter hashes, after accumulating enough previous transactions. Even so, the pruning of bitcoin blockchain has been riddled with problems, contrary to what Nakamoto’s whitepaper expected. This is because it’s difficult to guarantee the absence of a vital piece of information in a block that is selected for pruning.
Dealing with bigger transactions
“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.”
Unlike fiat currencies that have specific denominations, bitcoin is not set up in such discrete units. Even so, bitcoin still allows variable-sized payments
“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.”
Bitcoin is private, which gives it an advantage over other modes of transaction. All the same, the cryptocurrency has turned out to be less private as originally expected. This is evidenced by the creation of many other privacy-focused competitors. However, Nakamoto’s whitepaper envisioned other measures that bitcoin users could implement such as slightly altering key information in every transaction.
The defense mechanism
“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.”
Importantly, the whitepaper examines the possibility of attackers creating an alternative blockchain. This could only be possible if the attacker could convince the public to accept the false version. However, if an attacker hides behind other nodes, it is nearly impossible to reverse a bitcoin transaction.
What next for bitcoin?
The huge decline in bitcoin prices continues to draw mixed reactions from the investor community, with some concluding that the bubble will eventually burst. However, based on how the principles outlined in the whitepaper have worked to date, bitcoin has carved its space as the pioneer cryptocurrency and a key technology. That, of course, is its legacy regardless of how its value turns out eventually.