There’s a lot of interest in cryptocurrency recently and we all like to shout about what we think is great or not so great. But how many of us have taken time to read the actual White Papers which define what the project actually is?
Now, I have been guilty of the same thing. Although I like to watch a lot of YouTube videos and read journals and articles. Actually sitting down and reading a whole White Paper doesn’t seem that appealing.
But then I thought, why not kill two birds with one stone? (no birds were killed during the production of this post!)
I thought I would read the White Paper and post about it at the same time.
For the first White Paper, I thought I would go to where it all began, Bitcoin!
The White Paper is only 9 pages long and can be found here:
https://bitcoin.org/bitcoin.pdf
Page 1:
We dive into the first paragraph and this takes some time to absorb!
“Abstract. 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. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The
network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone”
This paragraph in itself has a number of items which need explaining, but let's start by reading the whole paper and then maybe it will make more sense
"1. Introduction
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model [1]. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. [2] These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party [3]. What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party [4]. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem [5] using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes [6]"
[1] So the first thing we need to understand is how the current financial system works. But that is far too complex a topic to discuss in one post, so we will stick with the more narrow discussion on how transactions work on the traditional financial system.
In the diagram below, you can see how the system relies on the approval and cooperation of the bank. If the bank or the authorities who are happy with the bank approve your transaction, then you have no real issue with the current system.
[2] The positives of the current system in simple terms are that the banks are in a position where they can mediate disputes. So if Mo wants his money back because Fatima never posted him her goods, there is a chance the bank could either reverse the transaction, or if Fatima has done this before, it may even freeze or close her account.
However, for providing this service as the trusted intermediary, the Bank charges large fees and has control over every ones bank balances. This is how they are able to create new money by issuing loans.
[3] If Mo and Fatima were to meet in person, then there would be no need for a bank and they could simply exchange cash. This removes high transaction fees, reversibility and censorship.
[4] So the aim of Bitcoin was to create the digital equivalent of cash, where you can hand the money from one person to the other, without the need to go through a bank.
[5] As most people who have used the internet or any digital medium know, it is super easy to copy any digital files. A lot of my misspent youth was spent downloading music on bittorrent. Took 20 minutes for one 5MB file! So the biggest problem with digital cash is, if it is just a file, what’s stopping someone from just making a copy of it? Or if it is a digital key that is used to spend the money, what is stopping the one user from sending that money out twice? This is the problem that Bitcoin solved which made it so revolutionary!
[6] This basically says that the system will remain secure as long as more than 51% of all the computational power that goes into securing the network remain honest
I am going to stop here for now! Stay tuned for the next part of the Bitcoin White Paper and my notes and discussions around it.
If you enjoyed it, upvote, resteem and comment. It will keep me motivated to continue! It takes quite a lot of time to read, write and draw diagrams!
Let me know what you think in the comments below.