Breaking down Satoshi Nakamoto’s Whitepaper – First Blockchain explained

Breaking down Satoshi Nakamoto’s Whitepaper – First Blockchain explained

Hello Friends,

In our last Blockchain blog, we tried to understand why Blockchain concept is required for our society and explained how and where we can use the concept to induce TRUST in our society. I hope, we now have fare understanding about impact of Blockchain technology in our life and we know few Usecases as well where Blockchain concept can be applied.

In this blog, I shall try to break down the Block chain from technological angle by going through the famous Whitepaper written by Satoshi Nakamoto. I shall highlight most important areas about Blockchain concepts written in the whitepaper with proper explanation, so, you can quickly pick up without going through the whole whitepaper itself. After that, I hope, you will be able to understand remaining Blockchain concepts and technology easily.

Let’s start with by providing a bit information about the Whitepaper.

Introduction

The whitepaper was introduced by Satoshi Nakamoto in the year of 2009 by Satoshi Nakamoto whose identity is still mystery. Satoshi Nakamoto named the Whitepaper as “Bitcoin: A Peer-to-Peer Electronic Cash System” explaining a peer-to-peer networking for electronic cash transaction without involving a centralized authority.

Although, it was primarily focused on Bitcoin i.e. most popular Digital Currency in our world now, the paper also introduced Blockchain technological concept which can be used for other applicable Usecases as discussed in our previous blog. If we clearly understand the concept behind Bitcoin currency, I believe, anyone can break down any other Blockchain, decentralized concept and technology going forward. Note, there are other Blockchain technologies which are different than Bitcoin but fundamentally they follow the path what Satoshi Nakamoto explained in the Whitepaper. We will also explain new type of decentralized technologies, such as DAG, in upcoming blogs. DAG is which is fundamentally different than Bitcoin concept.

As we know that Peer-to-peer network is most popular file sharing mechanism between sender(s) and receiver(s) while protecting privacy and avoiding central server. Satoshi tried to introduce the same concept to Financial transaction by introducing a Digital currency which cannot be centralized by any authority. Whenever, there is a central authority, such as Government, Bank etc. there is associated cost involved as its service charge. But, question is why do we need Central Authority? It is already explained here but in short, to TRUST other party involved in the transaction. Central authority makes sure that Buyer(s) is not cheated. However, despite of involvement from Government, Bank, legal authorities, there is always a possibility of fraud, transaction reversal. Satoshi wanted to address this problem to protect buyers and proposed a non-reversible transaction mechanism without involving any central authority, of course with help of Technology and mathematical algorithm.

Before breaking down the Technology involved with this concept, let’s be familiarized with common terms used in Blockchain concept as following

  • Transactions
  • Timestamp Server
  • Proof of Work
  • Network
  • Incentive

Transactions

Transactions is the core of any value transfer from one part to another. Any ownership transfer of currency or any kind of asset having any value is called Transaction. Note, what internet does with information, the same is going to happen for transactions due to Blockchain technology. Blockchain will revolutionize the transaction mechanism altogether.

In Blockchain world, specifically in digital currency paradigm, Bitcoin is transferred from one owner to another and Bitcoin is consisting of digital signature which ensures the authenticity of the Bitcoin. Each transaction is made of seller’s signature + buyer’s signature + Bitcoin value (a.k.a Proof of Work). Hence, multiple chronological transactions create a chain of block consisting digital signatures which can be verified by any buyer without having any central authority or governing body.

However, this drives another factor that all the transaction history must be in public domain. Hence, we need a system for participants to agree on a single history of the chronological orders in which they were received. The payee needs proof that at the time of each transaction, majority of members agreed that it was the first received. This is the core concept behind Blockchain technology.

How to maintain chronological order?

Timestamp server

This is the answer of above question. This will make sure that all the transactions are made sequentially and maintain a chronological order by specifying timestamp stored within itself. Digital signature a.k.a. Hash, will consist of timestamp of previous transaction and form a chain of timestamps of all previous transactions ensuring the chain was not tempered till current transaction.

What value is chronologically transferred?

Proof of Work

Yes, it is PoW.

To ensure the chronological order, timestamp hashing consists of a puzzle/problem which needs to be solved. That means a work is done to create a block which is appended to the next transaction. This work is called Proof of Work. This PoW requires extensive CPU usage for deriving the correct block for the transaction. The new block gets appended to the earlier chain of blocks. Any modification of the new block also requires whole new calculation of all the blocks prior to it, hence making the chain very difficult to compensate or tempered with. While solving the algorithmic problem, greatest Proof of Work effort spent by most CPU usage with longest chain is considered and block generated from it gets appended.

This strategical decision also ensures that if majority of the members (CPU holders) are honest and do not intend to tamper with the chain of blocks, there is no possibility of fraud within Blockchain system. Also, that implies that there is NO REFUND!

How will PoW be managed?

Network

Blockchain Network will be responsible to manage performing and accepting PoW. You can clearly understand by now that forming a chronological transaction history among all members (all sellers and buyers participated so far) certainly has formed a net of interaction channels. Interestingly, all participants will try to solve the puzzle and complete PoW as part of longest chain. Then, the node which successfully solved the puzzle first will inform completion event to all other members present in the Blockchain system or network. If majority of members of the network accept the new block by recognizing that there is no unauthorized modification then the block will be added to whole Blockchain network. Following activities will take place sequentially within the Blockchain network before a new block gets added to it

  • New transactions are broadcast to all nodes.
  • Each node collects new transactions into a block.
  • Each node works on finding a difficult proof-of-work for its block.
  • When a node finds a proof-of-work, it broadcasts the block to all nodes.
  • Nodes accept the block only if all transactions in it are valid and not already spent.
  • 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.

is there any interest participating in PoW?

Incentive

Deriving the Proof of Work to create new Block within Blockchain network requires solving a puzzle by investing CPU power and electricity. Hence, this must be compensated or rather this must be incentivise in such a way that members find it interesting to solve the puzzle. Otherwise, there will never be a new block which will result end of blockchain. First transaction in the very first Block, called Genesis Block, is the special transaction that starts a new coin owned by the creator of the block. Now, as there is no central authority, like Government, to issue coin every time there is a need, it is network members who need to invest their CPU power to create new block.

Incentivising the process of participating in new block creation is the strategical decision to make it lucrative and profitable. This is also called mining the block a.k.a. Bitcoin Mining. This also minimizes the fraudulent attempt or attack to the Blockchain network. A hacker may try to temper with all the previous transactions or blocks by investing considerable CPU power and electricity. Though, it is believed that staying honest and investing CPU power in proper way by solving puzzle for new blocks would be more profitable than by passing the correct process and rebuilding the whole blockchain all over again.

How does above concept actually work?

Let’s try explaining with little more technical detail, following topics will eventually explain the above question

  • Disk Space
  • Verification
  • Combining & Splitting Value
  • Privacy
  • Calculations & Algorithm

Disk Space

Fundamental concept of creating block within Blockchain requires space i.e. Disk Space. There will be many blocks for 1 or more transactions to be included in the Blockchain network. You can imagine that there will be huge number of transactions and so number of blocks will be created. Interestingly each block requires more space than earlier block as it includes all the history of transactions.

However, Satashi proposed an Optimization to use less Disk space if we discard Old transactions that are not relevant anymore, but keep the root information of it with main blockchain.

Satoshi also assumed that disk space requirement for the Blockchain network will not be a problem as ever evolving technology will outpace the speed of the space requirement. So, hardware will never be a problem.

So, how do we now verify the block what is stored in the disk space?

Verification

As Blockchain network maintains the longest chain of transaction, users can verify the authenticity of block by keeping a copy of the block headers of the longest proof of work chain and obtain the Merkle branch linking the transaction to the block it’s timestamped in.

One thing to note that, Satoshi assumed that majority of the members/nodes will be honest and this verification will be reliable. However, it is to be noted that if any attacker surprisingly possesses majority CPU power and induces a fabricated block. This is where the concept of 51% attack comes into the picture. Alerting mechanism to prevent this kind of behaviour was thought of in the Whitepaper too. But sometimes, it does not work as we have seen couple of occasions.

Any further optimization?

Combining and Splitting value

This is a bit simple optimization for increasing efficiency. I am not going into too much technical detail on this. But, in short, Satoshi proposed to club multiple transactions into smaller number of transactions as appropriate and produce smaller output.

Okay, understood, but do we maintain our privacy if all the transaction history is publicly available?

Privacy

In our traditional transaction mechanism, there is a centralized authority that ensures TRUST of that transaction and we rely upon the Central Authority completely to maintain our privacy. We believe that our privacy will not be disclosed by them.

In Blockchain network, Satoshi proposed that only public key/address will be available to public and that will be completely anonymous. This will only reveal transaction amount and sender & receiver address in the network. He also explained further by creating an analogy with Stock exchange which reveals limited information about a deal i.e. size, time but never reveal the associated parties. So, identity of trader within Blockchain network can be kept secret if they are following strict guideline of creating anonymous public key for receiving funds. Note, if identity is established for one public transaction, there is possibility to identify other transactions for the same identity.

Okay, seems interesting, now how all these works together within Blockchain network? What does exactly happen within Proof of Work?

Calculation

Satoshi tried to demonstrate and proved all the concept and hypothesis that he had made in his Whitepaper with required Mathematical calculations. I am not going into that much of higher level mathematical complexity in this article, but in short

He has proven that possibility of altering blockchain or relevant blocks faster than honest members/nodes is difficult and not even possible if majority of members are honest and ethical. He also proved that as Blockchain network grows and more members join, the probability will drastically reduce further. It will reach near to impossible evebtually.

He also proved the calculation by providing a sample C code as Proof of Concept.

Here you go, if you are reading this line that means you already understand core Blockchain foundation as proposed by Satoshi Nakamoto. Kudos!

We have tried to explain the Whitepaper as simple as possible, but if you like to go deep into, please fire up questions in comment section, CTT team will be happy to address all your technical queries.

Don’t forget to come back and visit our next blog on Blockchain and DAG which is considered as Blockchain version 3.0.

Author: Dhrubo

I am passionate about sharing Knowledge , Information and wisdom what ever way is possible. This is small contribution to our society from my part. I am a Programmer and love to architect and modernize IT infrastructure / solution / applications for my clients.

I am sharing my experience what I have gained so far via CTT and will keep doing so in regular basis. This is the whole purpose of founding this Knowledge Center for Cloud Technologies.

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