Bitcoin Whitepaper: Simplified for Everyone
Crypto Basics

Bitcoin Whitepaper: Simplified for Everyone

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8 months ago

Want to know what the Bitcoin whitepaper is all about? We understand this document can be overwhelming. Our guide breaks down each section in simple terms, making it accessible to everyone.

Bitcoin Whitepaper: Simplified for Everyone

Índice

The Bitcoin whitepaper has served as the blueprint of the cryptocurrency and blockchain sectors since 2008 when it was first published on a cryptography mailing list by an enigmatic individual or group called Satoshi Nakamoto.
Titled "Bitcoin: A Peer-to-Peer Electronic Cash System”, the whitepaper served as an antidote to the global banking crisis of 2008, which the genesis block of Bitcoin referenced months later by including a famous newspaper cover. A number of overleveraged banks collapsed during the subprime mortgage crisis and ultimately got bailed out by their governments, while thousands of retail investors and homeowners lost everything.

The newspaper cover added to the Genesis block

Choosing this dramatic failure of the banking system as its main focus, the Bitcoin whitepaper proposes an ambitious new decentralized digital cash system that did not rely on traditional financial institutions, instead using cryptography to ensure the security and authenticity of transactions. It proposed the use of a proof-of-work system, incentives and a timestamp server to prevent double-spending and maintain the integrity of the network.
The publication of the whitepaper generated significant interest in the tech and cryptography communities, leading to the creation of the first Bitcoin software in 2009. Satoshi Nakamoto remained anonymous and eventually disappeared from public view, leaving the development of Bitcoin to the open-source community, where it has thrived ever since.

Blockchain technology, as outlined in the whitepaper, has since created a digital asset revolution, being used to give birth to thousands of new cryptocurrencies and other digital assets.

This article will break down each section of Nakamoto’s very important Bitcoin whitepaper to make it easier to understand for Bitcoin beginners and readers who want to understand how Bitcoin and blockchain technology work.

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Bitcoin Whitepaper in Broad Strokes

  • The Bitcoin Whitepaper was published on 31 October 2008 by Satoshi Nakamoto
  • The paper introduced Bitcoin as a digital currency and proposed a trustless system of electronic transactions.
  • The paper is only nine pages long, and in 12 sections, it attempts to explain complex technical concepts in easy-to-understand language.

Abstract

The Bitcoin whitepaper opens with an abstract that summarizes the intent and content of the document.

Bitcoin aims to create peer-to-peer (P2P) technology for direct payments between multiple parties without having to rely on financial institutions to act as trusted intermediaries, thus making transactions faster, cheaper and the whole financial system more transparent and secure.

All digital currency systems must first solve the issue of double spending, where a token could be spent twice if duplicated or falsified. This is the reason we use intermediaries, like banks, to have a party that can mediate in such cases. However, mediation leads to more verification and thus slower and more expensive transactions.

To overcome this, Satoshi proposes Bitcoin’s decentralized network use cryptography and a combination of innovations such as a timestamp server, proof-of-work consensus mechanism, and block incentives to ensure that honest nodes, who want the best for the chain, collectively control the blockchain’s hash power (the total computational power of the network).

Sorry for making you read all that. I just wanted to wake you up a little. While these concepts might as well be in Greek for you right now - if you’re new to Bitcoin - we will cover everything in detail in this simplified Bitcoin whitepaper guide. When you’re done, come back to this section and read it again to see if you understand it!

Introduction

Satoshi kicks things off with a first chapter that criticizes the traditional financial system, where people are forced to rely on centralized parties, or intermediaries, to make digital transactions. These systems work based on trust, which is provided by a third party, usually a bank, who runs the network.

However, this trust system has some major weaknesses.

  • The third party has to handle transaction disputes, which makes completely non-reversible transactions impossible.
  • This mediation adds costs and slows down transactions.
  • Also, some fraud cannot be avoided and merchants need to collect more customer information, leading to privacy issues.

So why do we tolerate a system that gives us expensive and slow transactions, fraud and lack of privacy? Simple: we’re scared of double-spending.

What Is Double Spending?

The double-spending problem occurs when a person spends the same digital currency twice. While this is not possible with physical fiat currencies, where you can’t spend a physical note twice, double spending can certainly happen in digital currency systems.

Where there is no party in the middle to keep records, mediate and enforce as needed, transactions are non-reversible.

It’s like a football game without a referee. Who’s keeping score and how? The answer: no one. This might be all fun and games when you’re a kid, but when you’re playing for your financial freedom, you’re playing for keeps.

This is where Satoshi’s genius begins to show. They state that we don’t need a financial system based on trust (ie. the third-party referee who we hope remains impartial and didn’t place a huge bet on the home team).

Instead, we can use technology, specifically cryptography, to establish a trustless system (read: Bitcoin) to enable direct electronic payments without the need for intermediaries.

In blockchain and Bitcoin, the spectators and players are all referees, working together to keep score.

TL;DR

The traditional financial system suffers from slow and expensive digital transactions by being forced to use trusted intermediaries, like banks, to avoid the risk of double spending. Bitcoin solves this by using cryptography, instead of trust, to establish a decentralized network ledger of all transactions, validated by the majority of participants.

Transactions

Cool, now Satoshi has outlined the problem that needs to be solved: we need to find a way to eliminate double spending from this new financial system we are creating to be free of intermediaries. Let’s talk strategy!

What Is a Coin?

First off, Satoshi defines an electronic coin as simply a chain of digital signatures, in other words, lines of protected online code. The ledger containing a history of all transactions is the actual currency.

To transfer a coin, the owner (payer) must do the following: 1) Digitally sign a hash of the previous transaction2) Digitally sign the recipient’s public key 3) Add these signatures to the end of the coin, which the recipient (payee) can verify to confirm the payer’s ownership.

Still, while the payer might be the owner, what’s to stop him from double spending the coin (sending it to more than one payee)? Until now, a trusted central authority or mint is used to check every transaction.

However, if this party messes up their records or worse, goes bankrupt, poof! There, potentially, goes all your money, like we’ve seen in 2008 and 2023’s banking crises.

In Satoshi’s words:

“We need a way for the payee to know that the previous owners did not sign any earlier transactions.”

To solve double spending, they propose two objectives to achieve this and help synchronize records:

  1. All transactions must be announced in public.
  2. A system is needed where a majority of the network agrees on a single history of the order in which transactions were received, validates them, and provides proof of this to each payee.

This means that only the first transaction with a coin counts. The network users must be aware of all transactions, and all later transactions must be rejected.

TL;DR

An electronic coin is just a bunch of verified signatures that accumulate over time as its ownership changes. Signatures alone may prove who owns a coin, but can not stop double-spending. For this, the network needs to either use a trusted intermediary or time-stamping cryptography to ensure there is consensus on the history and order of all transactions.

Timestamp Server

OK, so now we know what a financial system must look like in theory to slay the double spending dragon. Let’s talk execution.

How do we create this single united timeline of Bitcoin transactions, and kill off a potential Back-to-the-Future-like multiverse where you’re stuck in your Delorean after losing all your Bitcoin Lambos to an unscrupulous crypto Biff Tannen? You get the idea.

Well, it’s actually quite easy. Satoshi proposes specific software to digitally timestamp data and thereby create a chronological order of transactions.

The timestamp server provides public proof for anyone to see that a particular block existed on the blockchain at a specific time.

Each block contains data on multiple transactions and all of this gets added to the mathematical hash function, which in turn spits out a hash.

What Is a Crypto Hash?

A hash is a unique, cryptography-created short string of numbers and letters, which provides proof that the block is correct and authenticated. Bitcoin uses a specific hashing algorithm called SHA-256.

Bitcoin's SHA-256 hashing refers to the specific cryptographic hash function utilized in the Bitcoin network. It stands for Secure Hash Algorithm 256-bit, and it is a widely used hashing algorithm in various applications, including Bitcoin.

In Bitcoin, SHA-256 hashing is extensively used in various aspects, including the verification of blocks, the creation of digital signatures, the mining process and the overall security of the blockchain. Its cryptographic properties contribute to the immutability and trustworthiness of the Bitcoin network, making it resistant to tampering and ensuring the validity of transactions and blocks.

When a Bitcoin miner adds a new block to the blockchain, they timestamp the block's hash, which also includes the previous block's timestamp.

The new timestamp proves the data exists, and reinforces all the other timestamps before it. This creates a chain of verified blocks (let’s just call it a blockchain💡) that can each prove the authenticity of all previous timestamps.

This is very important because the Bitcoin network runs on a distributed system of computers that must together agree (reach consensus) on the longest chain of data records.

This hash plays a crucial role in the Bitcoin network. All transactions are time-stamped and hashed, and they get broadcasted to the network for verification, where it’s used to solve complex related mathematical problems (in proof-of-work, which we cover next).

Once a miner solves the problem, the transaction is confirmed and added to the blockchain, forming a permanent record of all transactions that prevents double-spending. Even if the payer sends the same coin to other parties, only the first transaction to be timestamped is accepted as valid. This helps the whole Bitcoin network share only one history of transactions.

TL;DR

The timestamp server provides a timestamped hash that is publicly available to everyone in the Bitcoin network to verify. This ensures that transactions are processed in the correct order, which in turn prevents double-spending and adds an extra layer of security to the Bitcoin network.

Proof of Work

Great! Now that we know how to solve double spending (answer: a timestamp server), the next challenge is to figure out how to achieve this AND keep the bad guys from overwhelming the network with spammy denial of service (DOS) attacks or fraudulent transactions.

The answer, as with most things in life, is that you gotta put in the work. In this case, Proof-of-Work is the transaction processing tool that, despite its high energy consumption, has made Bitcoin the safest and most decentralized cryptocurrency in existence.

What Is Proof of Work?

Proof of Work (PoW) is a consensus mechanism that ensures all transactions on the Bitcoin network are verified and added to the blockchain in a secure and tamper-proof way.

Here's how it works:

Miners compete to solve a really complicated math problem by guessing a unique number called a "nonce", which they use to create a hash code that has to be lower than a certain target value, proving that the necessary work has been done to create a new block.

This process requires a lot of computing power on purpose, making it hard for anyone to cheat the system and ensuring that blocks do not get created too fast, thereby inflating the supply of Bitcoin more than is needed. The Bitcoin whitepaper calls this a “one-CPU, one-vote system”.

The honest nodes in the network follow the rules and work to keep everything secure and control a majority of the network’s CPU power (we discuss the reasons in the “Incentives” section later).

When a miner successfully solves the PoW puzzle and updates the blockchain, they get a block reward paid out in Bitcoins immediately. This incentivizes miners to help keep the system running and secure.

While the timestamp server figures out the order of all transactions, its PoW mechanism makes Bitcoin tamperproof, ensuring that nobody can flood the network with fake transactions due to the high cost and difficulty level. Satoshi recommends the algorithm change its difficulty based on how frequently blocks are created, in order to keep up with technological advances as per Moore’s Law.

A block's hash has to meet specific conditions, and the longest valid chain with the most work is considered the right chain.

TL;DR

PoW establishes a tamper-proof transaction history, which involves solving a cryptographic puzzle, and once a valid block is discovered, it is shared, verified and added to the blockchain.

Network

OK, slowly but surely, Satoshi’s Bitcoin vision is coming into focus. Can you see it yet?

Section five of the Bitcoin whitepaper is short, providing a step-by-step guide needed to run the network.

These steps are as follows:

  1. Participants in the network broadcast transactions to all nodes.
  2. Each node collects all new transactions into a block.
  3. Next, each node uses computational power to try and find the right hash value for a very complex math-based Proof of Work problem.
  4. Once it solves the hash, it broadcasts this to the network, with the first node claiming the block rewards.
  5. The network nodes check the block, and if it hasn’t been spent yet, declares it valid.
  6. Nodes now start the race for the next block in the chain.
  7. If two nodes broadcast two different versions of a block, the nodes consider the one on the longest chain as correct. (The rejected one is called the Uncle block)
  8. Once the block is successfully added, the other nodes recognize it as the definitive blockchain, update their records and start working on the next block on that chain.

TL;DR

In the Bitcoin network, transactions are broadcasted to all nodes, collected into a block, and validated through a complex Proof of Work problem before being added to the longest blockchain, which is recognized as the definitive record by all nodes.

Incentive

Now that it’s been established how to queue transactions (with a timestamp server), and process them correctly (through proof of work), the next step is to devise a scheme to motivate users to use their hardware to help grow and secure the network.

Running a node to mine Bitcoin is both expensive and complicated. As the equipment and electricity prices increase, Bitcoin’s PoW algorithm gets more difficult over time.

Without these miners to put in the work in Proof of Work, there could be no sustainable Bitcoin network, which means no digital gold, no HODLing, and certainly no glorious altcoin seasons or DeFi Summer for all the degens reading this.

Therefore, miners must be incentivized to work hard and stay honest, doing what’s best for the network. The system does this by rewarding the first miner to solve a block’s proof-of-work puzzle with a fixed amount of newly-minted Bitcoin in the first transaction of the new block.

In theory, the block reward can either come from newly-minted coins or from collected transaction fees. Right now, it’s all newly minted Bitcoin, also known as increasingly valuable virgin Bitcoin, which is born free of any potentially harmful associations with previous crimes.

When the last Bitcoin, number 21,000,000, is mined in around the year 2140, only transaction fees will be used to reward miners.

The Bitcoin mining incentive is another shining example of Satoshi's brilliance, as it keeps nodes “honest” and working not only for their own benefit but also for the greater good of the entire network.

Nodes are discouraged to try to cheat or overtake the network by the high amount of computing power required. Let’s say an attacker(s) gathers more hash power than all the honest nodes, they have a choice of rolling back the chain to steal back their payments, or they can rather just mine new Bitcoins with it. The first option destroys the value of all their coins, as participants will choose to leave such a corrupted network, while the second one preserves the value of their coins and allows them to gain more through mining. For any party acting in their own self-interest, only option 2 makes sense.

OK hold up. I see a hand in the back.

You ask: How come has 19 million BTC already been mined in under 15 years, but it will take another 120 years to mine the remaining 2 million BTC?

Pay attention, because you should know the answer to this question!

Roughly every four years, the Bitcoin halving event cuts Bitcoin’s block rewards by 50% in order to slow down inflation and drive up its value. The next halving, projected for June 2024, will reduce its current rewards at block 840,000 from 6.25 Bitcoins per block to a measly 3.125 Bitcoins per block. The Bitcoin halving algorithm is touted by many experts as the reason why we experience a classic 4-year cycle in crypto, as it creates a huge supply shock.

TL;DR

Bitcoin has no centralized intermediary to play policeman and stamp out bad behavior. Therefore the Bitcoin network (and all other public blockchains) must incentivize and reward its miners by offering block rewards for the first miner that finds the right transaction hash value needed to create a new block.

Reclaiming Disk Space

This section can get a bit tree-ky, as it introduces the concept of Merkle trees.

In short, Satoshi foresaw that, over time, Bitcoin’s blockchain would grow massive in size, requiring more and more storage capacity from nodes. This adds another costly barrier to entry for miners, which is not ideal when you are trying to build a global decentralized currency to be used by billions of people.

Therefore, they proposed that the Bitcoin ledger should be kept lean without compromising its historical data.

Instead of deleting past transactions, Satoshi recommended using a Merkle Tree to make their data more compact in order to save disk space, by saving only a trace or root of each of these historic transactions.

What Is a Merkle Tree?

A Bitcoin Merkle tree is a way of organizing and verifying all the transactions that occur within a block on the Bitcoin network. A Merkle tree is a way of storing data that makes it easy to check if any part of the data has been changed or tampered with.

A Merkle Tree hashes all the transactions in a block into pairs, which it then hashes together. It continues until there is only one hash left, known as the root hash, which is used to verify that all the transactions in the block are valid and haven't been tampered with. Any attempt to alter a single transaction is immediately noticeable and will result in the rejection of the entire block.

TL;DR

Storage space is important to the future of Bitcoin. Therefore, Merkle trees shrink historical data to a single root hash without impacting their cryptography, thereby helping to preserve the ledger’s total disk space.

Simplified Payment Verification

Great Scott! Let’s take a step back a second and admire the Bitcoin network’s magnificent framework, which is now clear as day for anyone to see - even through that pesky early Dark Web filter.

By now, we know the following about Satoshi’s invention:

  • What it’s going to do (solve double-spending)
  • How it’s going to do it (timestamping transactions and incentivizing proof of work verifications)
  • How it will save disk space to store all those billions of future transactions to come (Merkle tree)
Wait, I hear you say. ”What billions of future transactions? You said there are only 21 million Bitcoin that will ever be minted, not even enough for half of the (nearly) 50m dollar millionaires in the world!
Well, if you build it, they will come.

Welcome to section 8 of the Bitcoin whitepaper, which paves the way for Bitcoin’s mainstream adoption by billions of users around the world.

To use the Bitcoin blockchain, you don’t need to invest a fortune into running a full node (a digital copy of the entire chain) to verify payments.

This would not be sustainable and will, frankly, make it impossible for billions of regular people to join the Bitcoin revolution eventually.

Instead, you can simply download only the block headers and a Merkle branch that links transactions to their correct block. Most Bitcoin users do this nowadays automatically by using a basic crypto wallet application. Nearly all commercial software and hardware wallets are considered simplified payment verification (SPV) nodes.

While these lightweight SPV wallets cannot check the validity of a transaction, they allow users to make transactions quickly, easily and securely.

SPV wallets do this by connecting to other nodes on the network to verify transactions, rather than downloading the entire blockchain. This allows for a much faster and more efficient experience.

TL;DR

You don’t need to run a full node in order to use the Bitcoin network. You can transact as you wish by using a lightweight Simplified Payment Verification (SPV) wallet.

Combining and Splitting Value

Even 15 years after Satoshi’s whitepaper, how often do you hear your no-coiner friends say “I can’t afford to buy a whole Bitcoin”?

Here’s what to tell them:

Just like we can pay for anything under the value of $1 with various coins (cents), so can 1 Bitcoin be split into smaller fractions called satoshis, allowing it to be used for payments of any value. One satoshi equals 0.00000001 BTC, making Bitcoin a very practical currency to use, suitable for anything from property deals to micro-payments worth a few cents, to the new craze of Bitcoin Ordinals.

Bitcoin’s transactions are made up of multiple inputs and outputs, which allow BTC’s value to be either split into smaller parts before being sent somewhere or combined to create a bigger amount.

For example, if you have one whole Bitcoin, you can divide it into smaller parts, like 0.5 BTC and 0.5 BTC. Or if you have two smaller amounts of Bitcoin, like 0.3 Bitcoin and 0.7 Bitcoin, you can put them together to make one full Bitcoin and become a wholecoiner.

This feature is super important because it lets you buy things both more expensive and cheaper than 1 Bitcoin.  Also, by spreading all these pieces of BTC across the Bitcoin network, we allow potentially billions of wallet addresses to eventually hold at least some Bitcoin in them.

TL;DR

You don’t need to send or receive a full Bitcoin during a transaction. BTC can be split into smaller parts or combined to make a bigger amount.

Privacy

In traditional banking systems, all information about user’s transactions is usually protected and private, which opens the door to potential fraud and abuse.

Bitcoin aims to be a transparent and immutable public blockchain, but it doesn’t mean it doesn’t protect the privacy of its users when they transact.

All Bitcoin transactions are recorded on its blockchain without revealing personal information, and the parties in each transaction are only identified by a unique alphanumeric public key. To maintain security, Bitcoin requires a private key, that only the user knows, in order to sign a transaction.
However, all Bitcoin transactions can still be traced back to their public key, also referred to as a public address, which can link back to your real identity if you’ve completed Know-Your-Customer (KYC) verification on a centralized exchange somewhere previously, in order to comply with anti-money laundering (AML) regulations.
This makes Bitcoin pseudonymous, which means it’s only partially anonymous.

Looking back now, this can be viewed as a beautiful compromise by Bitcoin’s creator to ensure that the network provides users with some privacy during transactions without sacrificing transparency and security, and remains flexible enough to meet the various regulatory compliance standards, which Satoshi expected to come as the network gained traction over time.

Calculations

Still here? We’re near the end, and this next section is super complicated and not really important unless you’re into flexing your math skills. In this section, Nakamoto provided calculations to consider how many blocks would need to be added before a recipient could be confident the sender could not change the transaction. In short, section 11 considers the scenario of an attacker trying to generate an alternate chain faster than the honest chain.

TL;DR

It would be highly unlikely for the Bitcoin network to be successfully attacked by fraudsters due to the massive amount of computing power required.

Conclusion

In the final section of their masterpiece, Satoshi recaps their whitepaper, highlighting all the different components of Bitcoin and how they worked together to create a secure electronic payment system that did not rely on trust between parties.

  • While digital signatures can be used to control ownership, a way had to be found to prevent double-spending.
  • Satoshi proposed a P2P network that records transactions and becomes difficult for attackers to change if honest nodes control most of the CPU power.
  • The network is simple, unstructured and robust.
  • Nodes don't need to be identified and can come and go as they please, as long as they accept PoW data when they return.
  • Nodes vote with their CPU power to accept valid blocks and reject invalid ones.
  • The PoW consensus mechanism can enforce rules and incentives.

Bitcoin Whitepaper: Key Takeaways

Thank you for reading this simplified guide to the Bitcoin Whitepaper. It’s been an honor to share the genius of Satoshi Nakamoto’s masterpiece with you, and I hope you now understand why the virtues of Bitcoin continues to spread across the world.

Here is a recap of a few things to remember before you go so you can recite them the next time a no-coiner tells you crypto is a Ponzi:
  • Bitcoin is built on blockchain technology to create a decentralized database that records digital transactions.
  • Bitcoin transactions use cryptography instead of centralized intermediaries to maintain security and privacy, and they are pseudonymous in nature.
  • Proof of Work is used to prevent abuse of service attacks by requiring members of the network to prove that a specified amount of work has been completed, which is incentivized with rewards in the form of Bitcoins.
  • The Bitcoin network keeps a trace or root of transaction data to maximize disk space and keep the entire history of the blockchain intact.
  • You don't have to be a miner to be involved in the Bitcoin network; you can also send and receive Bitcoins with a Bitcoin SPV wallet.
  • Bitcoins can be split into multiple parts or combined to make a larger amount for better practicality and efficiency.

The Bitcoin Whitepaper: What Has Changed Since 2008?

No blockchain is an island, not even Bitcoin, which has gained some notoriety for its followers’ resistance to change. Following the whitepaper’s release, Bitcoin has undergone some of the following changes:

  • Nakamoto added a 1MB block size limit to the Bitcoin code in 2010 to prevent technical challenges.
  • The debate over the 1MB block size became more heated, with some believing it limited Bitcoin’s potential as a global currency standard and that Satoshi didn’t anticipate the huge surge in network activity and user numbers.
  • Eventually, the issue led to 2017’s Bitcoin Cash (BCH) hard fork, which split the Bitcoin community into two camps by creating a forked chain with a block size of 8MB to include more transactions.

BCH proponents held fast that Satoshi couldn’t have anticipated the rapid growth of the network, and that based on the title of his whitepaper, Bitcoin should become digital cash, not digital gold. This debate still rages on today.

  • As mining difficulty increased, miners abandoned CPUs in favor of custom-built ASIC mining machines and began working together in mining pools, making Bitcoin’s nodes more centralized and energy-intensive.
  • Bitcoin can now be used with the Lightning Network for small, instant payments.
  • Nowadays, due to its increasing value, slow transaction speed and reputation as an inflation hedge, thanks to its limited supply and periodically halved mining rewards,  Bitcoin is considered to be more like digital gold than electronic cash.
  • Bitcoin’s Taproot upgrade in 2021 brought with it smart contract functionality, better privacy and reduced transaction data. This has since led to interesting new use cases, such as Bitcoin ordinals NFTs and BRC20 assets
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