This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. Satoshi Nakamoto's white paper that first introduced Bitcoin to the world was posted to Bitcoin.org in 2008 and outlines the idea behind Bitcoin and how the system works. Red by NFX. Abstract.
A purely peer to peer version of electronic cash would allow online payment 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 law 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 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 nonreversible payments for nonreversible 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 2 willing parties to transact directly with each other without the need for a trusted third party.
Transactions that are computationally impractical to reverse where protects 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 cure 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 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 Flint and 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 Flint based model, the Flint was aware of all transactions and decided which arrived first.
To accomplish this without a trusted party, transactions must be publicly announced and we need a system for participants to agree transaction, the majority of notes agree it was the first received. 3, time stamp server. The solution we propose begins with a 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 use Pete post.
The time stamp 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 a hash forming a chain with each additional timestamp reinforcing the ones before it. 4, 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 Bach's hash cache rather than newspaper or use net posts.
The proof of work involves scanning for a value that when hashed such as with s h a dash 256 the hash begins with a number of 0 bits. The average work required is exponential in the number of 0 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 blocks hash the required 0 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 1 CPU 1 vote.
The majority decision is represented by the longest chain, which has the greatest proof of work ever 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.
To compensate for increasing hardware speed and varying interest in running nodes 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 a network are as follows. 1, new transactions are broadcast to all nodes. 2, each node collects new transactions into a block 3, each node then 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 2 nodes broadcast different versions of the next block simultaneously, some nodes may receive 1 or the other first. In that case, they work on the first one they receive, 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 then 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 note 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 a 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 the 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 has entered circulation, the incentive can transition in finally to transaction fees and be completely inflation free. Than all 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 determine the system and the validity of his own wealth. 7, reclaiming disk space. Once the latest transaction in a coin is buried under enough blogs, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the block's hash, transactions are hatched in a Merkel 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, that's 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, simplified 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 Merkel branch linking the transactions 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 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 notes 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, 2 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. Conclusion. We've 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 Morgan 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. For more audio essays from the people who've built companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit the founder list at nfx.com, or subscribe to the nfx podcast at podcast.nfx.com, or wherever you get your podcasts.