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Bitcoin White Paper Beginner Guide

Bitcoin whitepaper

December 1, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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Bitcoin whitepaper is one of the most significant entities in cryptocurrency markets. Satoshi Nakamoto announced Bitcoin on Halloween of 2018 by releasing the whitepaper. The date has since become symbolic to crypto enthusiasts.  

Bitcoin marked a new turn in financial services. It introduced a way for founders to explain to investors about a project. A detailed whitepaper shows dedication and creates trust. 

The Bitcoin whitepaper has been so successful. They are becoming part of the regulations. 

Here is a simple Bitcoin whitepaper for crypto beginners. It looks into the content of the whitepaper. It also analyzes what it got wrong and right, and future challenges.

Components of Bitcoin Whitepaper 

Bitcoin whitepaper expands on all the significant parts of the coin. Here are the 12 sections of the document;

  • Introduction 

Satoshi Nakamoto introduces the coin through the challenges of the current financial system. He discusses the web's reliance on third parties to process electronic payments. While the traditional payment systems seem to work, they have their challenges.

Some of the concerns are the possibility of reversing transactions arising from disputes. The involvements of the third parties also increase transaction costs. The system also accepts the inevitability of fraud. The users only have to trust the banks to do the right thing.

The new system eliminates uncertainty. It is a peer-to-peer payment system over an online network.

It replaces the third parties with a reliable verification process. Also, the system provides for irreversible payments for merchant protection. 

  • Transactions 

As a new payment method, it takes time to understand the transaction. Bitcoin whitepaper explains it as a chain of digital transactions. Owners sign on previous transactions then include a public key for the next user.

The one concern that comes with cryptocurrencies is the possibility of double-spend. This is where someone uses a single Bitcoin to pay for more than one trader. Bitcoin whitepaper eliminates this by providing for a public ledger. It records all the transactions history of the tokens. 

  • Timestamp Server 

The timestamp is the top feature for stopping double-spend. It takes a hash of a block and makes it public. The timestamp works such that every next confirms the previous one. No transaction becomes successful if the timestamp doesn't tally.

  • Proof-of-work

Proof-of-work is how the system implements the timestamp server. It is all about determining the hash matches from the previous and next transactions. Every node comes with a unique numerical number. 

The system relies on computer power to solve the mathematical puzzle. A recipient then confirms if the digits are correct. The payments only go through with accurate solutions. 

Proof-of-work makes it impossible to hack Bitcoin. To mess one transactional means redoing a whole block. No single person has such a capability.

  • Network 

The Bitcoin whitepaper provides for a way through which the network operates. The step by step detail is; 

  1. New transactions are broadcast to all computers in the system.

  2. The node collects new transactions into a block. 

  3. Each node finds a reliable proof-of-work. 

  4. The node broadcasts the found proof-of-work to the other nodes.

  5. Nodes verify all transactions within a block are valid then accept it. 

  6. The node becomes part of the chain. It starts helping in creating the next block in the chain.

  • Incentive 

The transaction confirmation is essential to the blockchain. It also involves a lot of work. 

Bitcoin whitepaper provides for a reward system. The reward reimburses miners for spending time, computers, and energy on the process. 

The reward can be in the form of Bitcoin or transaction fees. There is a limited number of Bitcoin supply. It means the coins might run out while the verification is still needed. By then, the miners would depend on transaction fees for incentives.

The incentives also ensure honesty. A malicious user can decide to use the puzzle solutions to defraud users. The motivation means playing by the rules is still as attractive.

  • Reclaiming Disk Space 

Keeping several transaction details is costly to space. The Bitcoin whitepaper allows deletion of the confirmed transaction and only keeping the roots.

  • Simplified Payment Verification 

Even though great for security, the whole verification takes time. The Bitcoin whitepaper allows for a more straightforward payment verification process. The only concern is if the attackers can take advantage.

Still, the nodes alert the system in case of any inconsistency. It then fails to verify the alerted transaction.

  • Combining and Splitting Value 

The system prefers combined transactions that are separated. There is no need to separate transactions when sending to the same recipient. Separation takes time as every transaction undergoes the validation process.

Bitcoin allows combination by supporting more than one input and output per transaction. 

  • Privacy 

Privacy is one of the reasons for cryptos' popularity. Satoshi provides anonymous address keys for privacy. Even though there are public ledger records, one can't know the identity of the user. It also provides for a private key.

The private keys help avoid payments linked to a common address. Only the address owner can access the private keys. The whitepaper also allows businesses with frequent transactions to run their nodes.

  • Calculations 

Bitcoin whitepaper envisions the possibility of attackers in the chain. These are people looking to solve mathematical puzzles and use them for their gain. Satoshi shows that they cannot beat the central system.

The system has several computers working on a single node. One person can't solve all nodes' puzzles. 

The system requires nodes in consequents to form a blockchain. The attacker then has no chance of success. 

  • Conclusions 

The bitcoin whitepaper concludes that peer-to-peer electronic payment is the way to go. It relies on a distributed network to confirm transactions. With validation, there is no need for expensive third parties. It also depends on proof-of-payment and digital signing to stop double-spending.

The system has an elaborate verification process. The system stays safe as long as there are mining computers; for this, it provides incentives.

Bottom Line 

Bitcoin whitepaper remains the most critical crypto document. Most of the other coins are always building on it. They are either looking to correct their shortcomings or use it as a benchmark.

It has been the guiding force behind Bitcoin. It will keep being relevant as the crypto world becomes mainstream.

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