bitcoin-white-paper

What the Bitcoin White Paper Can Teach You About the Blockchain

Bitcoin has been built upon a technology called Blockchain. This technology allows decentralizing transactions or interactions among parties without the need of a middleman and without necessarily relying on trust but math and probability. Since then, new blockchains protocols are in use and have been proved effective so far to offer alternative business models. For instance, the Steem Blockchain allows online publishers to monetize their content. In this article, I want to show you a few key takeaways from Bitcoin White Paper by Satoshi Nakamoto.

Cut off the middleman

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.

One critical aspect of the blockchain thought by Satoshi Nakamoto is cutting off the middleman.

The proof-of-work as a central concept

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.

What makes the whole blockchain system thick is the proof-of-work. In fact, to deter service abuse, the protocol requires a computer to performing computational work.

Business with less data

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.

Today businesses like Facebook and Google have built a fortune thanks to the data of their users. However, this business model is asymmetric and lacks transparency. Instead, with the blockchain, a transaction can occur with a few information.

Trust the cryptographer

system based on cryptographic proof instead of trust,

Another compelling aspect of the blockchain is the fact that it relies on math and probability rather than human trust. This is true to a certain extent. In fact, as the network grows the more effective, it should become.

The collective is good

The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

Another assumption of the blockchain which is connected to the previous one is that for it to work, honest nodes have to control more CPU power compared to attacker nodes. We will see why this is the case – from the probabilistic standpoint – when the blockchain reaches a critical mass.

The fragility of centralization

The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.

Centralization works but it’s quite fragile, and it creates a bunch of side effects. For instance, if we think about governments and banks substantial transactions fees, frauds and corruptions are some of those. Also, an asymmetric system, where one authority has power over a large number of people by controlling their data. The blockchain avoids just that. Of course, as the blockchain is based on a private key that if stolen or lost cannot be either replaced nor generated again third parties that secure private keys have become the norm. This makes Bitcoin less decentralized as it seems.

How does the blockchain transaction process work?

1) New transactions are broadcast to all nodes.

2) Each node collects new transactions into a block.

3) Each node works on finding a difficult proof-of-work for its block.

4) When a node finds a proof-of-work, it broadcasts the block to all nodes.

5) Nodes accept the block only if all transactions in it are valid and not already spent.

6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.

Majority rules

Nodes always consider the longest chain to be the correct one and will keep working on extending it

The blockchain process for approving transactions is based on the fact that the longest chain is assumed to be the correct one. So if a shorter chain finishes first, the longest chain will still win over the shortest.

Privacy is in the master key

The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.

As the private key is anonymous, so the privacy of the person that holds is kept so. This is a central principle of the blockchain.

Honest nodes win

We consider the scenario of an attacker trying to generate an alternate chain faster than the honest chain. Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent.

and it continues:

Given our assumption that p > q, the probability drops exponentially as the number of blocks the attacker has to catch up with increases. With the odds against him, if he doesn’t make a lucky lunge forward early on, his chances become vanishingly small as he falls further behind.

There is a probabilistic reason why honest nodes win against attackers and that is what makes the blockchain thick.

 

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Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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