Once upon a time a man, an organization or some kind of fairy-techy-godmother called Satoshi Nakamoto, created a really detailed paper (A.K.A) "Bitcoin: A Peer-to-Peer Electronic Cash System" in order to introduce a new way to create transactions without a regulatory third party.
Basically, that we would exchange values on the internet without having to rely on some entity to validate it.
That's how bitcoin was born.
The paper is divided in 12 sections. I, therefore, aim to explain them all one by one in the most simple way for everyone to get it. No tech-savvy terms or weird words not defined :)
1. Introduction
We are so used to the default transactions including a central authority, right? Why? They cost more, they are unpractical and require lots of personal information given to the trusted party.
What if we would introduce a new way of electronic payment that could be done without a third party, a "person to person" transaction that can be safe for either sellers and buyers. All trusted on a cryptographic system*
A cryptographic system is a system based on codes and numbers to keep secret information safe. Remember when you were a kid and had a secret language that only you and your friends could understand? Well, sort of that, but within computers.
2. Transactions
Being a bitcoin a chain of digital signatures, anyone who owns a coin will have a signature to prove they really own it. A possible problem known as Double-Spending is introduced: What if I own a coin and there's a possibility that I could have already spent it? Who's going to verify that?
To acknowledge this, we need to see if there were any transactions already signed; therefore, we have to see all the transactions. These last mentioned are public, so everyone can verify and agree whether it is spent or not. On the Bitcoin system, only the earliest transaction is the one that counts.
Solution is presented and explained on the following section.
3. Timestamp Server
Timestamp: a sequence of characters or encoded information identifying when a certain event occurred, usually giving date and time of day, sometimes accurate to a small fraction of a second-Wikipedia
All the servers that keep the records of the transactions happening on the bitcoin blockchain put "labels" to each block of transactions. Let's suppose it's a physical record: a piece of paper where the date and time of the moment that you spent your coin is written so, the servers will all check the register and agree on whether you have or have not spent the coin.
This procedure is a general idea that leads us to the next section.
4. Proof-of-work
To verify the transaction and establish consensus, the servers (or miners) have to solve a puzzle, find a number that, for instance, starts with a certain amount of zeros. All the miners try to find it at the same time, and this could take millions of tries. The miner that finds it first and adds the block to the blockchain will be rewarded.
5. Network
How does this network work?
All the transactions are broadcasted to all the nodes (a computer that receives the transactions data), which collects the transactions into a block and do the Proof of work procedure to each block. When a node finds the proof of work, it tells to all the nodes about it and they accept it if all the transactions are not already spent. After that, they create the next block in the chain.
6. Incentive
The first transaction in the block starts a new coin, that is owned by the creator of the block, meaning that the nodes which support the network get rewarded with coins by the amount of blocks they create. Also, transaction fees help funding the incentive.
According to the white paper, this incentive makes the nodes stay honest. What I mean by honest is that the system works in favour of the node that follow the rules, by making it generate more coins than if it would have to steal everyone else's payments.
Win-win situation.
7. Reclaiming Disk Space
To get a general idea, all the information from each transaction that is part of the block is compressed/compacted in order to make it lighter to be kept in memory.
8. Simplified Payment Verification
For a payment to be verified, any node that keeps a copy of a part of a block (the part has to be the block header) can ask to other nodes of the network to see if the transaction can be confirmed.
The verification will be reliable as long as the network has a majority of honest nodes.
9. Combining and Splitting Values
To allow value to be split and combined, transactions contain multiple inputs and outputs- Bitcoin White Paper.
Kind of self explanatory, we can split the value of a bitcoin and combine the values of different bitcoins to trade them. Just like paper money, let's pretend we buy something for $8. We can have several bills to complete a sum (multiple inputs: two bills of $5 to make $10) and the returning change (One output: $2 )
10. Privacy
Transactions in the network are public, but identities are kept apart from the transaction and the value. According to the level of anonymity that the user wants to have, he/she will have as many public keys (addresses) as transactions made to avoid being related to the operations.
11. Calculations
In this section, we find different algorithms related to the probability of an attacker node (dishonest node) trying to create a chain in order to cheat the system and take money that never belonged to him.
12. Conclusions
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. Nodes 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.-Bitcoin White Paper.
To sum up the paper, all the stages that a transaction goes through are described. "Any needed rules and incentives can be enforced with this consensus mechanism" is the phrase that leaves the door open to new uses of this blockchain technology.
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