Fifteen years later, Satoshi Nakamoto’s Bitcoin Whitepaper stands tall as the founding pillar of cryptocurrency, the genesis of the Bitcoin network, and the first steps on a long road to creating a revolutionary payments system that has left an indelible mark on the world.
It marked the beginning of the Bitcoin ethos, a vision that gave way to the birth of trustless technologies meant to empower individuals to serve as their own decision makers, all without intermediaries.
Today, the Bitcoin whitepaper celebrates its 15th anniversary during a pivotal year for Bitcoin. While much has changed in those 15 years, Satoshi's whitepaper is still viewed as one of the most revolutionary developments in the tech world and beyond.
The Birth of Bitcoin and Trustless Technologies
The whitepaper begins by identifying major problems within the existing electronic payments systems, namely fees and privacy concerns associated with routing transactions through traditional institutions. Nakamoto’s solution to those problems was proposed as such: “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.”
Largely, the set of concerns Nakamoto identified in the legacy system can be thought of as trust and mutability. Banks require your personal information, access to your money, and access to each and every transaction you place on their network. You are forced to trust them to safeguard all of these things in order to be allowed access to the global financial system, while playing by a set of rules laid out by financial institutions.
Mutability is a large concern given that these institutions have the final say on who is allowed to use their network and whether a transaction between two parties is valid, while also introducing external costs to users via mediation. Any payment made through an institution is subject to review and mediation, which can result in the transaction being reversed or funds being lost, as well as a host of other consequences like account termination. The presence of mediators requires funding, and is where fees levied on users enter the system. A knock-on effect of this is that since mediation is generally not cost-effective enough for these institutions to allow for micro-payments, huge swaths of the global population are excluded from the system and unable to reliably control their financial futures.
Therefore, Nakamoto and early members of the Bitcoin community decided to start building something that could replace that system, cutting out the middlemen and allowing anyone to take complete control over their financials.
What Bitcoin Was Created to Solve
The problems inherent to the global financial system certainly weren’t only identified in 2008, and indeed, there had been previous attempts to build digital currencies including Bit Gold, eCash, and Hashcash. None made a significant impact. By this time in 2008, though, these problems had been laid bare and the world was reeling from the impacts of a global financial crisis. Finding an alternative was now not just a niche conceptual hobby, but a necessity. Nakamoto’s Bitcoin whitepaper found itself in the right place at the right time, but a cryptocurrency that would have any hope of making a breakthrough still needed to solve its own problems.
Perhaps chief among these problems, and a major factor in why previous digital currencies failed, is the double-spend. Eliminating the double-spend was of paramount importance, and Nakamoto’s solution was the blockchain. The system proposed in the whitepaper defined the ‘coin’ as a public chain of ownership, timestamped and ran through a cryptographic hash to ensure its validity, and that only the transaction that arrived first on a given block is counted. The chain in the word blockchain refers to the inclusion of previous transaction timestamps in every future transaction, which helps ensure both immutability and easy dispute settlement.
That was just the first problem, though, and addressed only part of what was necessary to create a truly secure and immutable decentralized currency network. How could this data be stored on a public ledger in a way that prevents bad actors from manipulating the system?
Nakamoto’s suggestion took cues from the proof-of-work system developed by Adam Back for Hashcash. Each node of the Bitcoin network receives transaction data, which is collected into a block. These nodes compete to solve the block’s proof-of-work, an algorithm which adjusts for difficulty based on the number of nodes participating, and broadcast the block to all other nodes which can then validate the block and begin working on the next one.
This is a computationally expensive method of verification that requires both robust computing power and increased use of electricity. Therefore, to incentivize both participation and well-intentioned action, the winning node of each block receives a reward of newly-minted Bitcoin, as well as transaction fees sent by users. This mining reward also automates Bitcoin issuance and scarcity enforcement – only 21 million Bitcoin will ever exist.
The Bitcoin Process
The Bitcoin whitepaper lays out the basic steps involved in running the network as such:
- 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.
The next key element would be to secure user privacy for all parties. Rather than requiring a trusted third party to safeguard all personal and transactional data, Nakamoto proposed an anonymous public key encryption system that would allow for the network to see that an amount was sent from one party to another, but without any information linking the transaction to personal information.
The Bitcoin Whitepaper's Legacy
The core tenets established in the Bitcoin whitepaper have influenced the world of cryptocurrency to an astonishing degree. Most, if not all, of the more than 4,000 digital currencies can trace their DNA to this paper and its focus on immutability and privacy.
Beyond laying the foundations for Bitcoin, the largest and most widely used of these digital currencies, the trustless financial system proposed in the whitepaper has given rise to an entire decentralized finance ecosystem which aims to disrupt the existing orthodoxy and bring a permissionless, truly global system closer to reality.
The development of smart contracts, interoperability between blockchains in the broader ecosystem, and decentralized financial services have all been developed thanks to this whitepaper, and have made a remarkable impact on the world just 15 years later. What can the next 15 years bring?