Paper: “Bitcoin: A Peer-to-Peer Electronic Cash System”

The fundamental paper of crypto-currency bitcoin (PDF) was written by Satoshi Nakamoto. Who is Satoshi Nakamoto? We just don’t know. Nakamoto’s bitcoins currently yield a value of $4.2 billion USD, but he is not using that money for any purpose. He is not involved in Bitcoin anymore and the paper itself is a wonderful read. It is nice to see that people can still truely hide their identity. But people wonder about the motivation for this technology to this day. For now, let us focus on the paper and technical details.

The paper lays out the design of bitcoin based on the ideas of asymmetric cryptography, hashing and probability theory. The sections are named as follows:

  1. Introduction
  2. Transactions
  3. Timestamp server
  4. Proof-of-Work
  5. Network
  6. Incentive
  7. Reclaiming Disk Space
  8. Simplified Payment Verification
  9. Combining and Splitting Value
  10. Privacy
  11. Calculations
  12. Conclusions

The rationale for the cryptocurrency is given with decentralization; there is no central trusted party.

An electronic coin is defined “as a chain of digital signatures” (section 2). Coins are mined/created. And every coin is basically the set of signatures of how it was transmitted between parties. The author does not explain existing technology. He published the paper in 2008 in the mids of his development of Bitcoin Core 1.0, which took him at least 2 years. And most technical details are left out. The paper is reduced to the theoretical fundamentals and how certain threats are mitigated. For example, the Proof of work technology (section 4) was known since 1993 and he simply points out that he uses it with the number of leading zero bits of SHA-256 hashes to define a certain difficulty.

Reclaiming Disk Space (section 7) is solved by reducing a Merkle tree to its root hash. This way the block information is reduced. Only on demand the full information will be retrieved and verification can be done. This proves, that Nakamoto was well aware of the problem of an ever-growing global transaction log. I still consider it as one of the weak points of Bitcoin’s scalability. But we have to admit that many blockchain technologies emerged and are accessible to the mainstream these days. And blockchains solve the major problem of double spending, which I consider as the real innovation of the paper. In the final sections, he justifies that a malicious takeover of the network is unlikely or difficult if the honest blocks progress as usual. The more the malicious transaction branch diverges, the more difficult it will get to convince other users of its correctness. I have to admit, that so far, I don’t grasp his assumption of a Poisson distribution at page 7.

If you don’t fully understand the details, the bitcoin community maintains a bitcoin wiki covering topics such as Bitcoin Myths. And personally speaking, I understood Bitcoin much better back in 2012, when I listened to Chaosradio Express, episode 182 (German podcast). The paper gives an academic approach (references existing papers and just parameterizes existing ideas), but the podcast gives a step-by-step introduction for all cryptographic ideas implemented in bitcoin.

In conclusion, I am not convinced of Bitcoin. It has many issues, that seem to be ignored. But decentralized money is interesting and Nakamoto’s paper is a masterpiece of academic work. Still residing in Japan and struggling with the language barrier every day, I would like to conclude with the following quote from Wikipedia: “[…] but some speculated he was unlikely to be Japanese due to his use of perfect English and his bitcoin software not being documented or labelled in Japanese”. Indeed, the English in the paper is exceptionally well-written.

Paper: “Bitcoin: A Peer-to-Peer Electronic Cash System”