Bitcoin

It is impossible to explain blockchain without introducing Bitcoin.  This post is designed as an introduction to Satoshi’s whitepaper which, in 2009, introduced Bitcoin to the world.  Anyone attempting to understand blockchain applications in a meaningful way should be familiar with this publication, which is why we are featuring it in the first in a series of posts highlighting some of our favorite and most influential blockchain resources.  Please note that we are attempting to summarize the Satoshi whitepaper, a technical document, in plain English that the common person can understand. 

Until recently, banks have played the role of brokering trust between participants of financial transactions who do not know or trust each other.  Naturally, as a result, the financial system developed a critical dependence on banks.  Bitcoin, as introduced by Satoshi Nakamoto in 2009, is a new version of electronic cash where no central third party (i.e., a bank) is needed to create trust in the system.  The trust is in the distributed network and handled through cryptographic proof, rather than by a bank or a middleman.  A peer-to-peer network and digital signatures are the key instruments in solving the “double spend” problem that, until now, banks have been in place to solve.

How does the network operate? It’s remarkably simple. In fact, the genius of Satoshi’s design is this “unstructured simplicity” which adds to the security and robustness. It works as follows:

1. New transactions are distributed to the network of nodes.
2. Nodes collect transactions in a block.
3. Each node works on solving an energy-intensive Proof of Work (PoW) problem.
4. The winning node broadcasts the solution to nodes.
5. Nodes accept solution if all transactions are valid and coin is not already spent.
6. Nodes express acceptance by working on next block using hash of previous block.

All the transactions in a block are shared amongst all the network nodes through the PoW consensus algorithm.  This method of hashing and publicly announcing all transactions in a block gives the Bitcoin blockchain its transparency.  No one can argue that a transaction did not happen as long as it has been recorded on the growing, shared, and transparent blockchain.

The nodes on the network are rewarded for competing because they receive new Bitcoin when they solve a block, winning a competition every 10 minutes.  These “miners” are mining new bitcoin through the effort and energy they expend solving the PoW problem.  The energy output required for PoW consensus is a key feature because it makes the blockchain less vulnerable to attack.  The system is protected against fraud because transactions in the system are too computationally expensive to reverse.  Hacking the system is not practical, because it would require too much energy to take control of the network.