01. Introduction

The Problem with Trust

Commerce on the internet relies on financial institutions serving as trusted third parties. This creates weaknesses:

• Transactions can be reversed (Chargebacks).
• Banks require too much personal information.
• Transaction costs are too high for small payments.

02. Transactions

The Chain of Signatures

Satoshi defines an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner.

03. Timestamp Server

Proving Existence

To solve the double-spending problem, we need to know the order of transactions. A timestamp server takes a hash of a block of items and publishes it, proving that the data must have existed at that time.

04. Proof of Work

One CPU, One Vote

To prevent double-spending without a central server, we need a way for the network to agree on history. Satoshi proposed Proof of Work (PoW).

05. Network

How It Runs

The steps to run the network are:

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 by working on creating the next block in the chain.

06. Incentive

Gold Mining Analogy

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.

06.5. The Supply Cap

Deflationary by Design

Satoshi didn't just invent a payment system; he invented a new monetary policy. Unlike fiat currency which can be printed endlessly, Bitcoin has a hard cap of 21 million coins.

07. Reclaiming Disk Space

Merkle Trees

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.

08. Simplified Payment Verification

Light Clients

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.

09. Combining and Splitting Value

Inputs and Outputs

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.

10. Privacy

Anonymity by Design

The traditional banking model achieves privacy by limiting access to information. Bitcoin achieves it 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.

11 & 12. Conclusion

A Robust System

We have proposed a system for electronic transactions without relying on trust. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination.