Greetings and salutations my fellow plebs.
My name is Walker and this is the Bitcoin Podcast.
It's Tuesday, October 31st, 2023, so happy Halloween.
The Bitcoin Block Height is 814-721, and the value of one Bitcoin is still one Bitcoin.
It's also the 15th anniversary of the Bitcoin White Paper.
So for today's Bitcoin Out Loud Read, I'm going to read it for you.
If you're already deep down the Bitcoin rabbit hole, you've probably read it already, or
at least you should have.
So send this to your friends and family instead.
But if you're new to Bitcoin or still just Bitcoin curious, today is your chance to hear
about Bitcoin in Satoshi Nakamoto's own words.
If you want to watch me read the Bitcoin White Paper in my Ken costume, head to Rumble YouTube
or X and search at Walker America.
I have the diagrams available on screen in the video version for your reference as well.
If you're already watching this and you prefer audio, listen on fountain.fm or wherever you
get your podcasts by searching for the Bitcoin Podcast.
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or creating a clip of something you found interesting so more people can find the show.
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what the hell are you doing?
Now without further ado, let's get into this Bitcoin Out Loud Read.
Bitcoin, a peer-to-peer electronic cash system by Satoshi Nakamoto.
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 the 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.
1.
Introduction.
Commerce on the Internet has come to rely almost exclusively on financial institutions,
serving as trusted third parties to process electronic payments while the system works
well enough for most transactions, it still suffers from the inherent weaknesses of the
trust-based model.
Completely non-reversible transactions are not really possible, since the financial institutions
cannot avoid mediating disputes.
The cost of mediation increases transaction costs, limiting the minimum practical transaction
size and cutting off the possibility for small, casual transactions, and there is a broader
cost in the loss of the ability to make non-reversible payments for non-reversible services.
With the possibility of reversal, the need for trust spreads.
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.
These costs and payment uncertainties can be avoided in person by using physical currency,
but no mechanism exists to make payments over a communications channel without a trusted
third party.
What is needed is an electronic payment system based on cryptographic proof instead of trust,
allowing any two willing parties to transact directly with each other without the need
for a trusted third party.
Transactions that are computationally impractical to reverse would protect sellers from fraud,
and routine escrow mechanisms could easily be implemented to protect buyers.
In this paper, we propose a solution to the double spending problem using a peer-to-peer
distributed timestamp server to generate computational proof of the chronological order of transactions.
The system is secure as long as honest nodes collectively control more CPU power than any
cooperating group of attacker nodes.
2.
Transactions
We define an electronic coin as a chain of digital signatures.
Each owner transfers the coin to the next by digitally signing the hash of the previous
transaction and the public key of the next owner and adding these to the end of the coin.
A payee can verify the signatures to verify the chain of ownership.
The problem, of course, is the payee can't verify that one of the owners did not double
spend the coin.
A common solution is to introduce a trusted central authority, or mint, that checks every
transaction for double spending.
After each transaction, the coin must be returned to the mint to issue a new coin, and only
coins issued directly from the mint are trusted not to be double spent.
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, we need a way for
the payee to know that the previous owners did not sign any earlier transactions.
For our purposes, the earliest transaction is the one that counts, so we don't care
about later attempts to double spend.
The only way to confirm the absence of a transaction is to be aware of all transactions.
In the mint-based model, the mint was aware of all transactions and decided which arrived
first.
To accomplish this without a trusted third party, transactions must be publicly announced,
and we need a system for participants to agree on a single history of the order in which
they were received.
The payee needs proof that at the time of each transaction, the majority of nodes agreed
that it was the first received.
3. Time Stamp Server The solution we propose begins with the Time
Stamp Server.
A Time Stamp Server works by taking a hash of a block of items to be time stamped and
widely publishing the hash, such as in a newspaper or Usenet post.
The time stamp proves that the data must have existed at the time, obviously, in order to
get into the hash.
Each time stamp includes the previous time stamp in its hash, forming a chain, with each
additional time stamp reinforcing the ones before it.
Proof of Work To implement a distributed time stamp server
on a peer-to-peer basis, we will need to use a Proof of Work system similar to Adam
Back's hash cache, rather than newspaper or Usenet posts.
The Proof of Work involves scanning for a value that when hashed, such as with SHA-256,
the hash begins with a number of zero bits.
The average work required is exponential in the number of zero bits required, and can
be verified by executing a single hash.
For our Time Stamp Network, we implement the Proof of Work by incrementing a nonce in the
block until a value is found that gives the block's hash the required zero bits.
Once the CPU effort has been expended to make it satisfy the Proof of Work, the block cannot
be changed without redoing the work, as later blocks are chained after it.
The work to change the block would include redoing all the blocks after it.
The Proof of Work also solves the problem of determining representation in majority
decision making.
If the majority were based on one IP address one vote, it could be subverted by anyone
able to allocate many IPs.
Proof of Work is essentially one CPU one vote.
The majority decision is represented by the longest chain, which has the greatest Proof
of Work effort invested in it.
If a majority of CPU power is controlled by honest nodes, the honest chain will grow the
fastest and outpace any competing chains.
To modify a past block, an attacker would have to redo the Proof of Work of the block
and all blocks after it, and then catch up with and surpass the work of the honest nodes.
We will show later that the probability of a slower attacker catching up diminishes exponentially
as subsequent blocks are added to compensate for increasing hardware speed and varying interest
in running nodes over time.
The Proof of Work difficulty is determined by a moving average targeting an average number
of blocks per hour.
If they're generated too fast, the difficulty increases.
5.
Network The steps to run the network are as follows.
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.
Nodes always consider the longest chain to be the correct one and will keep working on
extending it.
If two nodes broadcast different versions of the next block simultaneously, some nodes
may receive one or the other first.
In that case, they work on the first one they received but save the other branch in case
it becomes longer.
The tie will be broken when the next Proof of Work is found and one branch becomes longer.
The nodes that were working on the other branch will then switch to the longer one.
New transaction broadcasts do not necessarily need to reach all nodes.
As long as they reach many nodes, they will get into a block before long.
Block broadcasts are also tolerant of dropped messages.
If a node does not receive a block, it will request it when it receives the next block
and realizes it missed one.
6.
Incentive By convention, the first transaction in a block
is a special transaction that starts a new coin owned by the creator of the block.
This adds an incentive for nodes to support the network and provides a way to initially
distribute coins into circulation since there is no central authority to issue them.
The steady addition of a constant amount of new coins is analogous to gold miners expending
resources to add gold to circulation.
In our case, it is CPU time and electricity that is expended.
The incentive can also be funded with transaction fees.
If the output value of a transaction is less than its input value, the difference is a
transaction fee that is added to the incentive value of the block containing the transaction.
Once a predetermined number of coins have entered circulation, the incentive can transition
entirely to transaction fees and be completely inflation free.
The incentive may help encourage nodes to stay honest.
If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would
have to choose between using it to defraud people by stealing back his payments or using
it to generate new coins.
He ought to find it more profitable to play by the rules, such rules that favor him with
more new coins than everyone else combined, than to undermine the system and the validity
of his own wealth.
7.
Reclaiming disk space Once the latest transaction in a coin is buried
under enough blocks, the spent transactions before it can be discarded to save disk space.
To facilitate this without breaking the block's hash, transactions are hashed in a merkle tree,
with only the root included in the block's hash.
Old blocks can then be compacted by stubbing off branches of the tree.
The interior hashes do not need to be stored.
A block header with no transactions would be about 80 bytes.
If we suppose blocks are generated every 10 minutes, 80 bytes times 6 times 24 times 365
equals 4.2 megabytes per year.
With computer systems typically selling with 2 gigabytes of RAM as of 2008, and Moore's
law predicting current growth of 1.2 gigabytes per year, storage should not be a problem,
even if the block headers must be kept in memory.
8.
Record payment verification It is possible to verify payments without
running a full network node.
A user only needs to keep a copy of the block headers of the longest proof-of-work chain,
which he can get by querying network nodes until he's convinced he has the longest chain,
and obtain the merkle branch linking the transaction to the block it's time stamped in.
He can't check the transaction for himself, but by linking it to a place in the chain,
he can see that a network node has accepted it, and blocks added after it further confirm
the network has accepted it.
As such, the verification is reliable as long as honest nodes control the network, but it
is more vulnerable if the network is overpowered by an attacker.
While network nodes can verify transactions for themselves, the simplified method can
be fooled by an attacker's fabricated transactions, for as long as the attacker can continue to
overpower the network.
One strategy to protect against this would be to accept alerts from network nodes when
they detect an invalid block, prompting the user's software to download the full block
and alerted transactions to confirm the inconsistency.
Businesses that receive frequent payments will probably still want to run their own nodes
for more independent security and quicker verification.
9.
Combining and splitting value Although it would be possible to handle coins
individually, it would be unwieldy to make a separate transaction for every cent in a
transfer.
To allow value to be split and combined, transactions contain multiple inputs and outputs.
Normally there will be either a single input from a larger previous transaction, or multiple
inputs combining smaller amounts, and at most two outputs, one for the payment, and one
returning the change, if any, back to the sender.
It should be noted that fan out, where a transaction depends on several transactions, and those
transactions depend on many more, is not a problem here.
There is never the need to extract a complete standalone copy of a transaction's history.
10.
Privacy 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.
The public can see that someone is sending an amount to someone else, but without information
linking the transaction to anyone, this is similar to the level of information released
by stock exchanges, where the time and size of individual trades, the tape, is made public,
but without telling who the parties were.
As an additional firewall, a new key pair should be used for each transaction to keep
them from being linked to a common owner.
Some linking is still unavoidable with multi-input transactions, which necessarily reveal that
their inputs were owned by the same owner.
The risk is that if the owner of a key is revealed, linking could reveal other transactions
that belonged to the same owner.
11.
Calculations 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 already
spent.
The race between the honest chain and an attacker chain can be characterized as a binomial random
walk.
The success event is the honest chain being extended by one block, increasing its lead
by plus one.
And the failure event is the attacker's chain being extended by one block, reducing the
gap by minus one.
The probability of an attacker catching up from a given deficit is analogous to the gambler's
ruin problem.
Suppose a gambler with unlimited credit starts at a deficit and plays potentially an infinite
number of trials to try to reach break even.
We can calculate the probability he ever reaches break even, or that an attacker ever
catches up with the honest chain as follows.
P equals probability an honest node finds the next block.
Q equals probability the attacker finds the next block.
Qz equals probability the attacker will ever catch up from z blocks behind.
Qz equals 1 if P is less than or equal to Q.
Q over P to the z power if P is greater than Q.
Given our assumption that P is greater than 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.
We now consider how long the recipient of a new transaction needs to wait.
Before being sufficiently certain, the sender can't change the transaction.
We assume the sender is an attacker who wants to make the recipient believe he paid him
for a while, then switch it to pay back to himself after some time has passed.
The receiver will be alerted when that happens, but the sender hopes it will be too late.
The receiver generates a new key pair and gives the public key to the sender shortly
before signing.
This prevents the sender from preparing a chain of blocks ahead of time by working on
it continuously until he is lucky enough to get far enough ahead, then executing the transaction
at that moment.
Once the transaction is sent, the dishonest sender starts working in secret on a parallel
chain containing an alternate version of his transaction.
The recipient waits until the transaction has been added to a block, and Z blocks have
been linked after it.
He doesn't know the exact amount of progress the attacker has made, but assuming the honest
blocks took the average expected time per block, the attacker's potential progress will
be a Poisson distribution with expected value lambda equals Z times Q over P.
To get the probability the attacker could still catch up now, we multiply the Poisson
density for each amount of progress he could have made by the probability he could catch
up from that point.
Sum from K equals 0 to infinity of lambda to the K power times e to the negative lambda
over K factorial times Q over P to the Z minus K power if K is less than or equal to Z, or
1 if K is greater than Z.
Rearranging to avoid summing the infinite tail of distribution, 1 minus sum from K equals
0 to Z of lambda to the K power times e to the negative lambda over K factorial times
1 minus Q over P to the Z minus K power.
Converting to C code, here Satoshi converts to C code as he explains, you can look at
the code for yourself if you want in the show notes.
Taking some results, we can see the probability drop off exponentially with Z.
For here he shows that for Q equals 0.1, starting out with Z equals 0, P equals 1, but by the
time you get to Z equals 10, P equals 0.0000012.
And for Q equals 0.3, starting with Z equals 0 and P equals 1, by the time Z gets to 50,
we have P equals 0.
Solving for P less than 0.1%, here he shows that for P less than 0.001, Q equals 0.10
for Z equals 5.
12. Conclusion. We have proposed a system for electronic transactions without relying
on trust.
We started with the usual framework of coins made from digital signatures, which provides
strong control of ownership, but is incomplete without a way to prevent double spending.
To solve this, we proposed a peer-to-peer network using proof of work to record a public history
of transactions that quickly becomes computationally impractical for an attacker to change if honest
nodes control a majority of CPU power.
The network is robust in its unstructured simplicity. Nodes work all at once with little
coordination. They do not need to be identified, since messages are not routed to any particular
place and only need to be delivered on a best effort basis.
Nodes can leave and rejoin the network at will, accepting the proof of work chain as
proof of what happened while they were gone. They vote with their CPU power, expressing
their acceptance of valid blocks by working on extending them and rejecting invalid blocks
by refusing to work on them.
Any needed rules and incentives can be enforced with this consensus mechanism.
And that's a wrap on this Bitcoin Out Loud episode of The Bitcoin Podcast. If you're
a Bitcoin-only company interested in sponsoring another fucking Bitcoin podcast, head to
bitcoinpodcast.net. You can also reach out to me on social media. On NoSter, go to primal.net
slash walker. And if you want to follow the Bitcoin podcast on Twitter, go to at titcoinpodcast
and at walkeramerica. You can always watch the video versions of this podcast at youtube.com
slash at walkeramerica and at walkeramerica on rumble and ex.
Bitcoin is scarce. There will only ever be 21 million. But Bitcoin podcasts are abundant.
So thank you for spending your scarce time to listen to another fucking Bitcoin podcast.
Until next time, stay free.