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The Bitcoin white paper has been written by Satoshi Nakamoto, the anonymous bitcoin creator who created the decentralized Bitcoin Network. The blockchain technology he describes in this article is not new , but using the combination of blockchain, cryptocurrency and proof of work resulted in the largest cryptocurrency that is still dominating the cryptocurrency market today. The amount of Bitcoin transactions are very high and bitcoin mining still is very profitable if you have access to cheap electricity and enough computing power.
The amount if bitcoin wallets and bitcoin transactions is rising fast and almost everyone who is in the cryptocurrency industry has at least a few Satoshi as one of their crypto assets. The price of Bitcoin BTC is always an important factor of cryptocurrency news and people are always trying to predict the right price on social media, such as Twitter. If you are thinking about mining or buying bitcoin, you should definitely read the Bitcoin Whitepaper first and learn about Bitcoin and cryptocurrency:.
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. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.
The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. The network itself requires minimal structure. Nakamoto says that proof-of-work is used to implement a peer-to-peer distributed timestamp network mentioned above.
The process scans for a value that when hashed, results in a certain numerical expression. The timestamp network must reconcile this value with a block's hash. CPU power is needed to satisfy the proof-of-work, and the block cannot be changed without redoing the work.
Later blocks are chained after it, and to change the block would require redoing all the blocks after it. The language may be technical but the concept is simple. Proof-of-work is what safeguards the blockchain. Nakamoto says that a hash created by a timestamp server is assigned a unique number that is then used to identify the hash in the blockchain.
Inherent in this unique number is a math puzzle that a computer must solve before a transaction can happen. Once a correct answer is given, it serves as proof that the specified work has been done. When someone sends an electronic coin, they must take a hash's unique number and solve an inherent math puzzle. The answer is then passed to the recipient to check if the solution is correct -- an important validation step.
If not, the proposed transaction is rejected. Otherwise an attacker may allocate several IPs in an attempt to hack the network. Secondly, the longest chain of blocks serves as proof that the CPUs invested the greater amount of work in that longer chain. This process secures the blockchain by requiring would-be-attackers to redo the work of the block and all blocks after it i.
Nakamoto says that it'd be an extremely difficult task for an attacker to do just that, and that the probability of success diminishes exponentially the more blocks are added to a chain. So how does proof-of-work protect the blockchain? In layman's terms, honest CPUs in the network solve each hash's math problem.
As these computational puzzles are solved, these blocks are bundled into a chronologically-ordered chain. Thus the term blockchain. This validates to the entire system that all the required "math homework" has been completed. An attacker would have to redo all the completed puzzles and then surpass the work of honest CPUs in order to create a longer chain -- a feat that would be extremely unlikely if not impossible.
This sequence makes Bitcoin transactions irreversible. Nakamoto points out that honest nodes in the network need to collectively possess more CPU power than an attacker.
As mentioned in earlier sections, nodes always consider the longest chain to be the correct one and will work on extending it. This section shows why it's important to announce transactions to all nodes.
It forms the basis for verifying the validity of each transaction as well as each block in the blockchain. As mentioned earlier, each node solves a proof-of-work puzzle and thus always recognizes the longest chain to be the correct version. As time progresses, the blockchain's record grows and provides assurance to the entire network of its validity. The first transaction in a block is a special transaction that starts a new coin owned by the creator of the block.
This achieves two things. Second, it's a way to initially distribute new coins into circulation since there is no central authority to issue them. The new coin rewards nodes -- aka Bitcoin miners -- for expending their time, CPU and electricity to make the network possible. They can also be rewarded with transaction fees. Nakamoto envisions a limited number of coins to ever enter circulation, at which point miners can be incentivized solely by transaction fees that are inflation-free.
New coins also incentivize nodes to play by the rules and remain honest. An attacker would have to expend a ton of resources to threaten the system, and getting rewarded by coins and transaction fees serve as a deterrent to such fraud. Mining gold requires labor, water and equipment and it's an activity similar to Bitcoin mining.
Since a maximum of 21 million Bitcoins will ever be mined, the system can be free of inflation. Therefore, Bitcoin can serve as a sustainable store of value, similar to gold. Compare that to fiat currency, such as the U. Due to inflation, the dollar has devalued nearly 97 percent since Bitcoin's incentive program is a mechanism that protects the peer-to-peer electronic payment system. The issuance of new Bitcoin as well as transaction fees keep nodes honest. Because it wouldn't be worth it to attack the very system that forms the foundation of their wealth.
As the saying goes, you don't bite the hand that feeds you. To save disk space, Nakamoto says that nodes can discard data from old transactions, with only the root of the discarded transaction kept in the block's hash.
This enables the blockchain to remain intact, albeit with less data from old transactions. He briefly describes a process for compacting data. But with Moore's Law, Nakamoto says that the future capacity of computer hardware should be sufficient to operate the network without miners having to worry about storage space. In this section, Nakamoto provides a technical explanation of how to verify payments without running a full network node.
That requires getting the longest proof-of-work chain and checking if the network has accepted it. The verification is reliable as long as honest nodes control the network.
But an attacker can create fraudulent transactions for as long as an attacker can overpower the network. One defense against an attack is for network nodes to broadcast alerts when they detect an invalid block. Such an alert could prompt a user's software to download the full block as well as alerted transactions in order to confirm the inconsistency. Nakamoto adds that businesses that receive frequent payments may want to consider operating their own nodes to achieve more independent security and quicker verification.
There are non-Bitcoin blockchain protocols that large companies are applying outside finance. For example, a company can create an invite-only protocol that selects certain parties to participate in a private network of nodes.
The point is, there are many ways to set up a blockchain network that follows a different set of rules for verification. Nakamoto describes one way to do so for a peer-to-peer payment system, but he says that businesses may want to adapt their processes based on their own unique circumstances. Combining transaction amounts will result in more efficient transfers as opposed to creating a separate transaction for every cent involved.
In other words, it'd be simpler and more efficient to send three Bitcoins in a single transaction rather than create three transactions of one Bitcoin each, assuming the coins are sent to the same recipient. To allow transaction values amounts to be split or combined, transactions can contain multiple inputs and outputs.
There can be single or multiple inputs. But there can only be a maximum of two outputs: one for the payment, and one returning the change, if any, back to the sender. This process enables payments with specific amounts.
With traditional payments, users attain privacy when banks limit information available to the parties involved as well as the third party. With the peer-to-peer network, privacy can still be achieved even though transactions are announced. This is accomplished by keeping public keys anonymous. The network may be able to see payment amounts being sent and received, but transactions are not linked to identities.
Additionally, Nakamoto proposes that a new private key should be used for each transaction to avoid payments being linked to a common owner. To maintain privacy, Nakamoto says it's important for public keys to keep a user's identity anonymous. While everyone may be able to see transactions, no identifiable information is distributed.