In 2008, Satoshi Nakamoto (anonymously) introduced bitcoin to the world through the whitepaper titled “Bitcoin: A Peer-to-Peer electronic Cash System”.
The aims were to allow direct electronic transactions between two parties, and eliminate issues of ownership and double spending, which is the reason third-parties (financial institutions) are involved in electronic transactions.
The whitepaper will be summarized here. A simple but extensive explanation is available on trybe.one website.
The abstract of the whitepaper gives an insight to what it’s all about, “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.”
The introduction is about the involvement of financial institutions as a trusted third-party in processing the transaction. It stated that it was not totally possible for the third-party to ensure non-reversal of transactions and so service costs were introduced to the transaction and the transfer of small amounts was made unreasonable. The proposed solution to this was a system that made computational reversal impossible thus protecting the seller and a regular escrow system to protect the buyer from purchasing an already sold coin. In carrying out transactions, an electronic coin (bitcoin) is transferred from the present owner to the next. This coin isn’t actually like a physical coin; it is a record of ownership which contains the history of all past transactions, and to transfer ownership, the person currently in possession of the coin signs a hash in the previous transaction and includes the address (public key) of the new buyer to the block. Fraud of double spending is eliminated by making every transaction public; the latest transaction involving a particular coin is displayed, making it possible to track the address of the coin and determine if the seller hasn’t actually sold it to someone else.
To maintain his objective, Satoshi introduced a decentralised network of nodes owned by different people or groups. These nodes are in a sort of competition. They all try to find the code to a transaction known as proof-of-work. According to the whitepaper, “Each node works on finding a difficult proof-of-work for its block.” This means different proof-of-works can be found by different nodes in the network. Other nodes on the network then decide to add more blocks to one they prefer until a period when one of the chains gets significantly longer than the others causing the other blocks to be discarded.
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It is possible for a person or group to own multiple nodes in the network, leading to the possibility of fraud. To discourage this, incentives are given to miners who successfully generate an accepted proof-of-work so that they support the network rather than work against it. The incentive given is a fixed value of bitcoin for each successful block. When a miner finds the hash value for a new block of transaction, new bitcoins are created, and the miner is in its possession as their reward. This idea has ensured that the bitcoin block-chain remains a holistic system since miners see it is as more beneficial to support the system than damage it.
The growth in the value of bitcoin shows how successful this plan has become; eliminating financial institutions’ involvement in electronic transactions thereby solving the problems that arise from trust, and also eliminating service charges and taxation collected on transactions.