Bitcoin by Satoshi Nakamoto - Summary
In the paper on Bitcoin, Satoshi Nakamoto proposes a solution to the double spending
problem in digital transactions. He is using a peer-to-peer distributed timestamp
server which generates computational proofs of the chronological orders of
transactions. Instead of trust governing the system, cryptographic proof is considered
as the base of trust among the peers. Also, there is an assumption that as long as
honest nodes control more computational power as compared to attacker(s), the
system will be secure from malicious activities or data tampering.
About Transactions, Nakamoto defines them as chain of Digital Signatures (similar to
Public Key Cryptography/Infrastructure). Now, in this chain of transactions (secured
by digital signatures), double spending problem can be solved using a central
authority, like a mint or a bank. This central authority checks all the transactions in its
database for any double spending. After every transaction, coin is issued by the mint.
This means that all the coins which the mint has issued can be trusted not to be double
spent (they might also be considered legal in the transaction network/coin network).
the problem here is that the central authority, or the bank is a vulnerability in this
system and what if the bank goes rogue? Now, we need to find a solution to the
double spending problem without using/ involving the central trusted authority, or the
bank. It is important to understand that the bank is aware of all the previous
transactions that have happened in the chronology. In the absence of trusted central
party, the transactions need to be publicly announced (broadcasted) to all the
participant nodes. Nakamoto also proposes a system or algorithm which governs that
all the participant nodes agree on one truth. The truth regarding the transactions and
their order.
Now, the solution, implementing a timestamp server on a peer-to-peer network. He
uses a Proof-of-Work similar what is there in Hashcash. In Hashcash, the nodes scan
or guess a value, that when hashed with SHA 256, the resultant hash begins with a
certain number of zero bits. For his timestamp server, Nakamoto implements the
proof-of-work by incrementing a nonce in the block until a value is found, which
when hashed gives the required starting zero bits. This scanning or guessing of value
(which include prev. Hash + nonce) requires a lot of Computational/CPU power. After
the CPU power has been expended, the block is added to previous blocks. To change
the block, the whole proof-of-work computation has to be performed by the CPU for
adding into the chain of previous blocks. Also, more blocks like this shall be added in
future, so if we want to change one block in the middle, the total work to change the
block will include changing the block (doing the proof-of-work for that block) and
changing the all the blocks after it (performing the proof-of-work for them also) .
This proof-of-work can also be used to compute majority in decision making
problems. In this case, Nakamoto says that Proof-of-Work is One-CPU-One-Vote. The
longest chain is the majority, because Proof-of-Work has been invested in it.
Any new transaction is broadcast to all the participant nodes. All Participant nodes
add the new transactions in a block, and work for a proof-of-work for that block.
Once, the proof-of work is found, the block is broadcasted. The other nodes perform
the proof-of-work and verify the validity of the transactions using old transactions.
There is also an idea of incentivizing the participant nodes so that they stay honest.
Since, all the transaction blocks are broadcasted to all the participant nodes, this
might pose a problem of storage of blocks as new blocks get added over time.
