Five Years Ago Today Bitcoin was Born – Read Satoshi’s Original White Paper

As all of my readers know, I am a huge supporter of Bitcoin for many reasons. What you may not know, is that five years ago today a still unknown individual(s) known by the pseudonym Satoshi Nakamoto released a white paper titled: Bitcoin: A Peer-to-Peer Electronic Cash System. The paper announced the Bitcoin concept to the world, and described how the network would deal with the wide variety of problems that might be encountered within the context of such an ambitious project.

Here is a screen shot of the original email:

Screen Shot 2013-10-31 at 3.33.45 PM

I just read through the entirety of the white paper and it is quite fascinating to observe the creator(s) thought process. Below are some of the excerpts I found most intriguing:

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.

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.

The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

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.

On Incentives…

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 of 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 favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.

On 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.

Full white paper attached.

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10 thoughts on “Five Years Ago Today Bitcoin was Born – Read Satoshi’s Original White Paper”

  1. The question about Bitcoin that I find constantly unanswered (or maybe I’m just missing the answer) is, what happens if there is a central bank/govt attack on it and they shut down the exchanges? I understand that the bitcoin entity will still exist but what happens if there are no exchanges or worse. What happens if there is an internet shutdown?

    Reply
    • There is no question that the weak link in the Bitcoin ecosystem is the exchanges, but everyone is aware of that and solutions will emerge. Things like this are already popping up where people meet and exchange in person. https://localbitcoins.com

      As far as the internet being shutdown. I mean if that is your base assumption, you may as well get in the missile silo and stick to canned beans. I do not think that will happen over an extended period of time.

      Best,
      Michael Krieger

  2. Can’t say I understand bitcoin, but the first comment beat me to it. The way things are going, I suspect there’ll be a splintering of the internet, some sort of brakes put on it – at the moment I can read your blog, but I forsee a day where I can’t. I’ll just get endless corporate ads and content.

    Not only is the internet vulnerable, but also power supply. Rolling blackouts already happened in California due to enron.

    All these things must be considered.

    Reply
  3. I agree with this last comment and I’d suggest to Michael Kreiger that instead of chucking rocks (‘I might as well live in a missile silo’ etc) that you also look at internet controls, the discussed Obama internet kill switch which is no conspiracy theory, or rolling blackouts etc as a very real question and concern about Bitcoin. We should all be discussing every real or potential threat to Bitcoin and it’s usage. If Bitcoin ever gets to the point of threatening central banks and major currencies the banking elite will declare war on it.

    Reply
    • Hold on a second. I was not being dismissive, I was being serious. If you believe the government will successfully shut down the web you should get in the missile silo. Not a joke, I would too. I just don’t assume that as a likely outcome, although anything is possible.

      You act as if people in the Bitcoin community aren’t aware of this risk. Everyone in it is. Indeed all tech people that care about freedom are also working on solutions. I wrote about this with regard to Meshnets earlier this year: http://libertyblitzkrieg.com/2013/08/13/meet-the-meshnet-a-new-wave-of-decentralized-internet-access/

      Several governments around the world have attempted to shutdown the internet. It didn’t last long.

      My point is simple. Should the off chance that the internet gets shut down for an extended period of time prevent you from putting 1% of assets into Bitcoin? Should it prevent you from supporting such a ground-breaking technology in general? In my view absolutely not, and that is my point.

      Best,
      Michael Krieger

  4. this guy was really brilliant. He’s going to have the richest family in the world at some point in the future. It looks like the bitcoin is winning too because it is starting to go mainstream. Mind checking my bitcoin blog out that I just made and maybe offer me some constructive criticism?

    Reply
  5. I t seems that the coins are going to go to the greediest with the most power as Satoshi said.

    If the network agreed to it then the coins could be mined with little power being used but then how would they be distributed…Instead we have a war and lots of power is being wasted as the same amount of coins are going to be made ..eg 1000 coins are produced in a certain time if abc amount of electricity is used to mine them

    1000 coins are produced in a certain time if 5000 times abc amount of electricity is used to mine them

    some absurdity here…

    Reply

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