Test

Bitcoin: A Peer-to-Peer Electronic Cash System

Satoshi Nakamoto satoshin@gmx.com www.bitcoin.org

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 a 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 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 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 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.

1

2. Transactions

We define 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 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 party, transactions must be publicly announced [1], 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 it was the first received.

3. Timestamp Server

The solution we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.

Hash

Hash

4. Proof-of-Work

To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof- of-work system similar to Adam Back's Hashcash [6], 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 timestamp 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

Bitcoin Glossary: 2018 Annual National Seminar

Address - A Bitcoin address is similar to a physical address or an email. It is the only information you need to provide for someone to pay you with Bitcoin. An important difference, however, is that each address should only be used for a single transaction. Typically consists of between 26 and 35 alphanumeric characters.

Altcoin - A form of cryptocurrency that has the same decentralized, peer-to-peer principles as bitcoin, but which uses its own blockchain and has its own rules of operation. Altcoin is the term used to describe those digital currencies that do not have as big a market capitalization or do not have the recognition of the current incumbent cryptocurrencies such as bitcoin, litecoin and dogecoin.

ASIC - ASIC stands for application specific integrated circuit, which is a specialized silicon chip that performs just one task. In the digital currency space, these chips process SHA-256 in order to mine bitcoin and validate transactions.

Bitcoin Index - The live bitcoin news bitcoin index is a weighted average index that shows the value of one bitcoin versus one single unit of currency of each of the majors in the Forex space -- EUR, USD, JPY, GBP and AUD.

Bitcoin Whitepaper - Written by Satoshi Nakamoto in 2008, it describes the original plan and protocol for Bitcoin.

BitPay - BitPay is a payment processing company and software that allows merchants such as eBay, Amazon and other online shopping channels to accept bitcoin as payment for its goods and services.

Block - A block is a record in the block chain that contains and confirms many waiting transactions. Roughly every 10 minutes, on average, a new block including transactions is appended to the block chain through mining.

Block Reward - This term refers to the "reward" that the Miner receives for successfully hashing a transaction block.

Blockchain - A digital file distributed to everyone participating in a crypto- currency network. The blockchain acts as a kind of general ledger, keeping track of all the transactions that happen in the network. Everyone can look at the blockchain to see what transactions have happened on the network, and the blockchain is sealed using cryptography so that no one can tamper with it.

Cold Storage -- A security measure for Bitcoin that is disconnected from the internet. Could be a paper wallet [see below], USB stick or hardware wallet.

Confirmation - Confirmation means that a transaction has been processed by the network and is highly unlikely to be reversed. Transactions receive a confirmation when they are included in a block and for each subsequent block. Even a single confirmation can be considered secure for low value transactions, although for larger amounts like $1,000 US, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.

Cryptocurrency - The broad name for digital currencies that use blockchain technology to work on a peer-to-peer basis. Cryptocurrencies don't need a bank to carry out transactions between individuals. The nature of the blockchain means that individuals can transact between each other, even if they don't trust each other. The cryptocurrency network keeps track of all the transactions and ensures that no one tries to renege on a transaction.

Cryptography - Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.

Dogecoin - An altcoin first started as a joke in late 2013. Dogecoin, which features a Japanese fighting dog as its mascot, gained a broad international following and quickly grew to have a multi-million dollar market capitalization.

Double Spend - If a malicious user tries to spend their bitcoins with two different recipients at the same time, this is double spending. Bitcoin mining and the block chain are there to create a consensus on the network about which of the two transactions will confirm and be considered valid.

Exchange - An exchange is exactly how it sounds, somewhere where account holders can exchange one digital currency for another or a Fiat currency for a digital currency.

Faucet - When an individual or team of individuals develop a digital currency, they may pre-mine a certain amount before release and give these pre-mined coins away. This is called a faucet.

FIAT - A Fiat currency is a traditional paperback currency that is regulated by an organization such as the central bank. Examples include the Euro, the US dollar and the Australian dollar.

Genesis Block - The very first block in the block chain of any digital currency.

Hash - A cryptographic hash is a mathematical function that takes a file and produces a relatively short code that can be used to identify that file. A hash has a couple of key properties: It is unique. Only a particular file can produce a particular hash, and two different files will never produce the same hash. It cannot be reversed. You can't work out what a file was by looking at its hash. Hashing is used to prove that a set of data has not been tampered with. It is what makes bitcoin mining possible.

Hash Rate - The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.

Microtransaction -- The ability to pay for things in very small sums thanks to the fact that Bitcoin may be extended to 8 decimal places. Microtransactions are especially important to Bitcoin casinos by providing players the ability to deposit and gamble fractions of Bitcoins.

Mining - The act of producing units of a cryptocurrency (such as bitcoins) through some kind of effort. The effort is required so that people can't just create infinite amounts of the digital currency, which would devalue it. In bitcoin, mining requires computing power. Here is a detailed description of how mining works. Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.

Mt. Gox -- one of the first Bitcoin exchanges that began liquidating after more than 850,000 of its users' Bitcoins were lost or stolen -- an amount equal to more than $450,000,000 at the time.

Output - When a bitcoin transaction takes place, the output refers to the destination address used in the transaction.

Paper Wallet - Some people prefer to store their bitcoin in the paper wallet -- a form of cold storage -- in order to improve security. The term simply refers to a printed sheet of paper that holds a number of public bitcoin addresses and corresponding private keys.

P2P - Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Output - When a bitcoin transaction takes place, the output refers to the destination address used in the transaction.

Paper Wallet - Some people prefer to store their bitcoin in the paper wallet -- a form of cold storage -- in order to improve security. The term simply refers to a printed sheet of paper that holds a number of public bitcoin addresses and corresponding private keys.

P2P - Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Private Key - A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.

Proof of Work [PoW] - Proof of work simply refers to the output of any efforts to mine bitcoin. In the bitcoin block chain, the hashing of a block takes time and effort, meaning the hash block can be considered proof of work.

Public key - The public key is a string of digits and letters (your bitcoin address). When hashed with a corresponding string known as a private key it digitally signs and online communication.

Satoshi -- A Bitcoin "cent", the smallest form of Bitcoins. One Bitcoin is equal to 1 million Satoshis

Output - When a bitcoin transaction takes place, the output refers to the destination address used in the transaction.

Paper Wallet - Some people prefer to store their bitcoin in the paper wallet -- a form of cold storage -- in order to improve security. The term simply refers to a printed sheet of paper that holds a number of public bitcoin addresses and corresponding private keys.

P2P - Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Private Key - A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.

Proof of Work [PoW] - Proof of work simply refers to the output of any efforts to mine bitcoin. In the bitcoin block chain, the hashing of a block takes time and effort, meaning the hash block can be considered proof of work.

Public key - The public key is a string of digits and letters (your bitcoin address). When hashed with a corresponding string known as a private key it digitally signs and online communication.

Satoshi -- A Bitcoin "cent", the smallest form of Bitcoins. One Bitcoin is equal to 1 million Satoshis.

Output - When a bitcoin transaction takes place, the output refers to the destination address used in the transaction.

Paper Wallet - Some people prefer to store their bitcoin in the paper wallet -- a form of cold storage -- in order to improve security. The term simply refers to a printed sheet of paper that holds a number of public bitcoin addresses and corresponding private keys.

P2P - Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Private Key - A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.

Proof of Work [PoW] - Proof of work simply refers to the output of any efforts to mine bitcoin. In the bitcoin block chain, the hashing of a block takes time and effort, meaning the hash block can be considered proof of work.

Public key - The public key is a string of digits and letters (your bitcoin address). When hashed with a corresponding string known as a private key it digitally signs and online communication.

Satoshi -- A Bitcoin "cent", the smallest form of Bitcoins. One Bitcoin is equal to 1 million Satoshis