2009 years this astute published a paper currency – a point-to-point electronic cash system “, after the currency was born, born to 9 years of coin currency price has been increased by a factor of 2 million, 2016 to present block chain industry also produced the explosive growth, more and more people begin to pay close attention to block chain industry, want to understand block chain, Satoshi Nakamoto’s paper is an important material that cannot be missed. Many important innovations in the blockchain industry up to now come from this paper. The study of this paper will help us to understand bitcoin and blockchain more quickly.
In Satoshi nakamoto’s paper, bitcoin first solves the problems of transaction trust, privacy protection and transaction fraud in transactions, and then provides reasonable returns to the operating participants in a low-cost operation mode, and eventually forms a decentralized self-operating financial system. Pioneered transaction hash, proof of work, time stamps and other key blockchain technologies, which have been used by other blockchain projects in the future. The following is an interpretation of Satoshi Nakamoto’s paper:
First, the problem of transaction
1. Trade trust
At the heart of the transaction is the issue of trust.
In traditional commerce, trusted third-party intermediaries are used to solve the problem. For example, Taobao shopping relies on Alipay to solve the problem of trust, and financial lending relies on banks to solve the problem of trust.
Bitcoin, on the other hand, uses public and private keys on both sides of the transaction to determine the identity of the trader, and pioneered a form of public broadcasting to solve the trust problem. The system grants and records a unique sequence of transactions between the two parties, which is then broadcast across the network and witnessed by all participants in the entire system.
2. Transaction fraud
In traditional commerce, banks serve as trusted third-party intermediaries in various transactions, but they often encounter fraud problems due to the time difference between payment and settlement. For example, bad checks, fake checks and so on. In order to solve the transaction fraud, traditional institutions such as banks spend a lot of costs to solve the problem, such as paying against the order first, such as extending the payment period, such as using high-tech methods to authenticate the identity of traders and so on.
Fraud problems may also exist in the currency network, even to entire network broadcasting, also may appear after A transfer to B, before the end of the deal is not the same money transfers to the problem of C, in the hearing in the thesis puts forward the concept of the timestamp, random hash encryption of every transaction data + timestamps to determine the uniqueness of the deal, The entire network broadcasts each transaction into a chained ledger that cannot be changed, eliminating the problem of fraudulent transactions.
3. Privacy
The public keys of both parties in the transaction are anonymous, and participants in the network are notified that a certain amount of money is paid by one person to another, but it is difficult to link the transaction to a specific person, that is, no one in the network knows who the parties are. Similar to stock trading, the data of stock buyers and sellers is public, such as how many shares are bought and sold at what time, while the identity of the buyers and sellers is hidden, meaning we do not know who is involved in the trading.
Ii. Operation of the system
1. System cost
In traditional business, the maintenance of the banking system needs a lot of human and material costs, such as office space, staff salaries, security costs, network systems and so on.
When bitcoin was designed, Satoshi Nakamoto envisioned an Internet system that did not need centralized maintenance, and therefore did not need an organizational structure, and did not need a fixed salary system. And the cost of the system operation personnel is completed through the rewards generated in the system operation, so as to realize the automatic operation of the system. From the point of view of economics, this is the lowest consumption of resources, the lowest cost of operation.
2. Automatic system operation
The developer and mining work is the core of the bitcoin system. The development of the bitcoin system was basically completed before The disappearance of Satoshi nakamoto, and the evolution of the system after that was repaired by the community based on the development of Satoshi Nakamoto.
In the operation of the Bitcoin system, the most critical work of coin coinage and bookkeeping is completed by miners, and miners get corresponding rewards through coin coinage and bookkeeping to ensure that miners have enough enthusiasm for work.
As for minting rewards, the paper defines them as follows: “The first transaction in each block is specialized, resulting in a new electronic currency owned by the block creator. This increases the incentive for nodes to support the network and provides a way to distribute electronic money into circulation without a centralized authority issuing money.”
Transaction fees are the source of bookkeeping rewards. Definition in the paper: “If the output value of a transaction is less than the input value, then the difference is the transaction fee, which is added to the incentive for the block. Once a given amount of electronic money is in circulation, the incentive mechanism can gradually be switched to relying solely on transaction fees, and the monetary system can be inflation-free.”
3. Epoch-making innovation
1. Decentralization
Entirely through peer-to-peer technology to realize electronic cash system, based on the principles of cryptography and not based on credit, it can make the online payment directly by party a and pay to the other party, any agreement the two sides, can directly to pay, without the need for a third-party intermediary’s participation, also does not rely on any centralized organization can run automatically.
2. Transaction verification
An electronic coin is a string of digital signatures like this: Electronic money is sent to the next owner by each owner attaching a randomly hashed digital signature to the Public key of the previous transaction and the next owner. The payee can verify the owner of the chain by checking the signature.
In order to exclude third-party intermediary institutions from the electronic system, then the transaction information should be publicly announced (Publicly announced). 1. We need all the participants in the whole system to have a unique and recognized historical transaction sequence. The payee needs to ensure that a majority of the nodes during the transaction agree that the transaction is the first to occur.
Each timestamp in each transaction should incorporate the previous timestamp into its random hash value, and each subsequent timestamp would reinforce the previous one, thus forming a Chain. Transaction verification uses digital signature + whole network broadcast + time stamp to solve the trust problem in transaction perfectly.
3. Proof-of-work
The proof-of-work mechanism introduces a scan of a particular value when performing a random hash, such as sha-256, where a random hash value starts with one or more zeros. So as the number of zeros goes up, the amount of work needed to find the solution increases exponentially, but checking the result only requires a random hash operation.
We add a random number (Nonce) to the block that causes the random hash value of the given block to have as many zeros as needed. We find this random number by trial and error until we find it. So we build a proof of work mechanism. As long as the amount of work consumed by the CPU satisfies the proof-of-work mechanism, the block’s information cannot be changed unless a comparable amount of work is redone. Since subsequent blocks are linked after that block, changing the information in that block also requires redoing the entire amount of work for all subsequent blocks.
Several benefits of proof of work:
1) Fair and effective allocation of block awards
Competition among miners is based on the number of random hash operations performed to ensure fairness and efficiency, and whoever does more work in the whole blockchain gets more blocks.
2) Ensure that blockchain data is difficult to tamper with
The longest chain representing the honest node contains the largest amount of work, and to modify an existing block, an attacker must redo that block plus all subsequent blocks, and eventually catch up and surpass the honest node’s workload. The chain with the most work must be the chain with the most complete data and must represent the interests of the whole network users.
3) Control the speed of coin issuance
The computing speed of hardware increases rapidly, and the degree of node participation in the network will fluctuate. To solve this problem, the proof-of-work difficulty will be determined using a moving average goal, where the difficulty points to a predetermined average block generation rate per hour. If blocks are generated too quickly, the difficulty increases to justify the amount of work done in minting and bookkeeping
4. System incentives
The traditional mining method of consuming resources is applied to the bitcoin system. The mining resources consumed by the Bitcoin system are CPU computing time and power resources.
The incentive for miners is to discover new blocks of bitcoins, and after all the bitcoins are mined, the high fees of the bitcoin system become the motivation for miners to keep working.
Fourth, the remaining problems
It has been nine years since the birth of the Bitcoin system. Now, looking at the original paper on the system design, I have to praise the advanced and rigorous design of the system beyond The Times. From the initial experiment, to a small range of applications, to now a quasi-commercial system with a market value of 60 billion DOLLARS, bitcoin has experienced countless tests.
However, bitcoin operates as a financial system so far. With more and more people using it, the problem of bitcoin network congestion is becoming more and more serious. The expansion debate has cast a cloud over the future of Bitcoin. The concentration of computing power in a few large mining pools also makes the bitcoin network more centralized; The skyrocketing problem of computing power caused by the rise of currency price makes mining consume more and more power resources; In the future, bitcoin holders, users of the bitcoin network, developers of the bitcoin system and miners will be required to solve the wealth inequality caused by the huge difference between the cost of holding coins of early participants and the cost of holding coins of current and future participants.
Five, the summary
With the development of the Internet, the global economic pattern has been increasingly transformed from offline real economy to Internet virtual economy. The past is the main source of wealth material assets such as real estate, mineral resources, physical goods, now the major source of wealth is knowledge, information and finance, create wealth also in the real economy gradually shift to the Internet, the currency system to create tokens, which is the core of the application block chain, the value of the bearing block chain project, It also provides the opportunity for wealth created in the real economy to transfer to the Internet.
Perhaps as the old cat said before: the world of blockchain, everything is just beginning.
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