I just started reading the “Bitcoin: A Peer-to-Peer Electronic Cash System” white paper. I’ve known about this document for some time but have at long last finally taken the time to read through. A couple of initial impressions. I am surprised at the short length of the document (only 9 pages) and the amount of specific material within. Given the amount of general confusion surrounding Bitcoin and digital currencies in general, a quick read of this document really clarifies a great deal. The author, Satoshi Nakamoto, succinctly states the purpose, motivation and theory of operation underlying Bitcoin.
The following are my highlights and thoughts on the front-end of the document, first with the 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.”
There are a few items that I find of interest within the abstract. First, the author explicitly states that the purpose of Bitcoin is to bypass financial institutions. This may seem obvious at first glance, however, given what I have read in some business sources and within the mainstream media, there seems to be general confusion about how Bitcoin would operate within our economic system. Is Bitcoin strictly a tool for Libertarians and goldbugs? Is it a Paypal alternative? Is it meant to replace the US dollar? According to this white paper, it appears that each of these assumptions is incorrect, at least in terms of the original intent. However, I have heard these questions posed in sources while doing preliminary research on Bitcoin.
If Bitcoin was originally meant to bypass financial institutions and that is the primary benefit – non-reversible transactions – where does this leave the companies such as Coinbase that are building a layer between the consumer and the digital currency itself? By doing so are they devaluing the digital currency and stripping away its primary benefit? By reducing the perceived risk and usability challenges with Bitcoin, are these activities potentially eliminating, or at least reducing, the true differentiation between Bitcoin and electronic money transactions such as wire transfers and Paypal?
Another interesting aspect is the mechanism for reducing the risk of double-spending. The length of the chain and incentive for individual node participation provide a philosophical self-interested system of sorts. As long as the number of participants (i.e., computational power) exceeds that of attackers, the risk of double spending will be reduced. This provides an incentive on both sides. First, it ensures that the system game mechanics must allow for sufficient reward for node participants to allow for the incentive to mine Bitcoins to exceed that of attacking the network itself. The decentralized nature and number of participants provides for a self-reinforcing system of sorts. If the system crashes, all participants ultimately lose, thereby providing incentive on that side as well.
The final aspect of the Abstract that is worth noting is the “at-will” nature of Bitcoin node participants. Individual nodes may come and go as they please. This aspects is essentially interlocking with the incentive mechanisms within the Bitcoin system. I am of the opinion that the “at-will” nature of the Bitcoin system is closely intertwined with a philosophy of self-interest. If it is in the self-interest of an individual Bitcoin node to provide hashing power to the overall Bitcoin network, they will do so. If the situation changes, and it is no longer in the self-interest for the same individual Bitcoin node to participate, for example, if it becomes unprofitable, or there is a lack of reward, then the very same individual node may simply withdraw their processing power by decoupling from the network, or potentially attack the network. This self-interested behavior from the individual nodes may be the cause of the reduction in Bitminter pool workers and increase in computation power, that I had referenced in a previous article.
1. Bitcoin. Bitcoin: A Peer-to-Peer Electronic Cash System: https://bitcoin.org/bitcoin.pdf
2. Coinbase: https://coinbase.com/
3. J.R. Sedivy. Bitcoin Metrics: http://jrsedivy.com/bitcoin-metrics/
4. Wikipedia. Satoshi Nakamoto: http://en.wikipedia.org/wiki/Satoshi_Nakamoto