SATOSHI
Bitcoin: A Peer-to-Peer Electronic Cash System
By Satoshi Nakamoto
Abstract: Imagine being able to send money directly to someone else online, just like handing them cash in person, without needing a bank or any middleman. Digital signatures can help, but they’re not enough by themselves because we still need to prevent double-spending (where the same money is spent twice). This is where Bitcoin comes in. Bitcoin solves this problem by using a network of computers that work together to keep a record of all transactions, making it nearly impossible to change or cheat the system.
1. Introduction
When you buy something online, banks and payment processors act as trusted third parties to handle the transaction. But this system isn’t perfect. It can be expensive, slow, and open to fraud. Plus, you can’t reverse transactions easily, which makes things tricky when there’s a dispute.
Bitcoin introduces a new way of making payments online—using cryptography instead of trust. It allows two people to trade directly, without needing a bank. Transactions are secured, so they can’t be easily reversed, protecting sellers from fraud. The Bitcoin network does all this by using a clever system of proof-of-work that keeps everyone honest and records every transaction.
2. Transactions
In Bitcoin, money is represented by a digital "coin." Each coin is actually a chain of digital signatures. When you send a Bitcoin, you sign it over to the next person, and they can verify the entire chain of ownership to see that the coin is legitimate.
The problem is making sure no one spends the same coin twice (double-spending). Normally, this would require a central authority like a bank. But with Bitcoin, the network of users themselves collectively verify that no double-spending happens.
3. Timestamp Server
To make sure all transactions are legitimate, Bitcoin uses a "timestamp server." This server takes a batch of transactions, makes a hash (a kind of digital fingerprint), and broadcasts it to everyone. This hash serves as proof that the transactions happened at a specific time and in a specific order.
4. Proof-of-Work
Bitcoin uses a system called proof-of-work to secure the network. It’s like solving a complex puzzle that requires a lot of computer power. Once the puzzle is solved, the solution is shared with the network, and everyone agrees that this is the true version of events. This process makes it very hard for anyone to alter the record of transactions because they’d have to redo all the work for all subsequent transactions.
5. The Network
Here’s how the Bitcoin network works:
- New transactions are broadcast to everyone.
- Each participant collects these transactions into a "block."
- Everyone works on solving a proof-of-work puzzle for their block.
- The first one to solve it broadcasts their block to the network.
- The network accepts the block only if all the transactions are valid.
- The accepted block becomes part of the chain, and the process starts again.
6. Incentive
To encourage people to participate in this network, Bitcoin rewards them with new coins. The first transaction in each block is a special one that gives the block’s creator a certain number of new Bitcoins. This is how new coins are created and enter circulation.
7. Reclaiming Disk Space
As more transactions happen, they get buried under newer ones. To save space, old transactions can be compressed in a way that keeps the network running smoothly without storing all the details of every single transaction forever.
8. Simplified Payment Verification
You don’t need to run a full Bitcoin node to verify payments. A lightweight version checks only the block headers (summaries of the blocks) and can still be confident that transactions are valid, as long as the majority of the network is honest.
9. Privacy
Bitcoin isn’t anonymous, but it’s private. Everyone can see the transactions, but they can’t easily see who is behind them. This is achieved by keeping public keys (your Bitcoin addresses) separate from your identity.
10. Conclusion
Bitcoin is a system for making online payments without relying on trust. It uses digital signatures and proof-of-work to prevent double-spending, allowing two people to trade directly without needing a third party. The network is secure, simple, and doesn’t require complex infrastructure to function.