hello everybody you’ve reached the cryptocurrency portal today is Friday May 31st and we’re gonna be talking about Bitcoin there are so many people that don’t understand Bitcoin and no matter how many times I try to explain it to people if you’re at a cocktail party or a friend’s house they just don’t get it and so I thought it’d be important to review Satoshi nakamoto’s original white paper that came out back in 2008 or October 31st 2008 and if you can go back almost 11 years and remember what was happening in the United States at that time in the world we had one of the greatest financial crisis since the Great Depression and who no one knew what was gonna happen and we were on the cusp of electing Barack Obama Senator Barack Obama’s president only a mere seven to ten days later so that’s what was happening in that time frame and satoshi nakamoto came out with this white paper just explaining what his vision was so we’re gonna go through his his abstract and white paper everyone learns differently some people love to just read something some people love to have something read to them I’m personally more of a visual person so I don’t like things read to me I like to read it myself and that’s just how I learned so but everyone learns differently so what we’re gonna do we’re gonna go through his white paper but I’m also gonna link a link to the white paper in the comment section below and in the description of this video so please bear with us and we’re gonna go through his abstract so Bitcoin a peer-to-peer electronic cash system by Satoshi Nakamoto here’s the abstract it’s 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 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 the proof-of-work the longest chain not only serves as proof of the sequence of events witness a 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 our 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 so section number one is the introduction commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to to process electronic payments while the system works well enough for most transaction it still suffers from the inherent weakness of the trust based model completely not reversible transactions are not really possible since financial institutions cannot avoid mediating disputes the cost of mediation increases transaction costs limiting to the minimal practical transaction size and cutting off the possibility for small casual transactions and there is a broader cost and the loss of ability to make non reversible payments for non reverse with all 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 to 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 distribution timestamp server to generate computational proof of the chronological order of transactions this system is secure as long as honest nodes collectively control more CPU power than any other cooperating group of attacker nodes section two transactions we define an electronic coin is 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 the ownership the problem of course is the payee can’t verify that one of the owners did not double spin 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 the solution is that the fate of the entire money system depends on the company run in 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 the purposes that earliest transactions is the one that counts so we don’t care about the later attempts to double spend the only way to confirm the absence of the transaction is to be aware of all transactions in the mint based model the mint was aware of all transactions and decided what to arrive first to accomplish this without a trusted party transactions must be publicly announced 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 section three time stamps server the solution we propose begins with the timestamp server a timestamp server serves server works by taking a hash of a block of items to be time-stamped and widely publishes the hash such as in a newspaper or you know set post the timestamp proves the data must have existed at the time obviously an or to get into the hash each timestamp includes the previous timestamp in attached form in a chain with each additional timestamp reinforcing the ones before it section for 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 atom backs hash cash rather than the 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 incrementally a nonce nonce in the block until a value is found that gives the blocks hash the required zero bits once the CPU effort is 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 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 majority decision making if the majority were based on one IP address one vote it could be subverted by anyone able to allocate mini 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 now ace any competing chains to modify a passed block an attacker would have to redo the proof of work of the block and all the blocks after 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 in average number of blocks per hour if they’re generated too the difficulty increases section 5 Network the steps to run the network are as follows number one new transactions are broadcast to all nodes number two each node collects new transactions into a block number three each node works on finding a difficult proof of work forks block number four when a node finds a proof of work it broadcasts the block to all nodes number five nodes accept the block only if all transactions in it are valid and not already spent number six 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 two nodes broadcast different versions of the next block simultaneously some nodes may receive one 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 that knows that we’re 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 would get into a block before long block broadcasts are also tolerant of dropped messages if a node does not receive a block it will request it when it receives the next block and realizes it missed one section six incentive by convention the first transaction in a block is a special transaction that starts a new coin owned by the creator of the 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 real central authority to issue them the steady addition of the constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation in our case it’s the CPU time in 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 has added the assented value of the block containing the transact once a predetermined number of coins have entered circulation the incentive can transition entirely to discern six transaction fees and be completely inflation free the incentive may help encourage nodes to stay honest if a greedy attacker is able to assemble more CPU power than all the honest knows he would have to choose between using to defraud people by stealing back his payments or using it to generate new coins he ought to find a more profitable play by the rules’ such rules that favor him with new more new coins and everyone else combined than to undermine the system ability of his own wealth section 7 reclaiming disk space once the latest transaction in a coin is buried under enough blocks the spent transactions before it can be discarded to save disk space to facilitate this without breaking the blocks hash transactions are hashed in an amoral tree with only the route included in the blocks hash old blocks can be compacted by stepping 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 or generate every 10 minutes 80 bytes times 6 times 24 times 365 equals 4.2 Meg’s per year with computer systems typically selling wood to gigabytes of RAM as a 2008 in 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 section 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 that the longest proof-of-work chain which he can get by querying network nodes until he’s convinced he has the longest chain and obtained the merkel branch linking the transaction 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 conformed the network has accepted it as such the verification is reliable as long as honest nodes control the network but as more vulnerable if the network is overpowered by an attacker while network notes can verify transactions for themselves this simplified method can be fooled by an attackers fabricated transaction for as long as the attacker can continue to overpower the network one strategy to protect against this would be to accept alerts from the network nodes when they detect an invalid block prompting the user 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 section 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 two outputs one for 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 heavy transactions history section 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 publicly Keys anonymous the public can see that someone is sending them out to someone else but without information linking the transactions to anyone this is similar to a level 4 information released by Stock Exchange where the time and size of individual trades the tape is made public without 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 one common donor some linking is still unavoidable the multi-input transactions which necessarily reveal that their inputs were owned by the same owner the risk is that the owner of a key is revealed linking could reveal other transactions that belong to the same owner section 11 calculations we consider the scenario of an attacker trying to generate an alternate coin faster than the honest chain even if this is accomplished this does not throw the system open to arbitrary changes such as creating value out of thin air or taking money that never belonged to the attacker nodes are not going to accept an invalid transaction as payment and honest nodes will never accept a block containing them an attacker can only try to change one of his owns transactions to take back money he recently spent the race between honest chain and an attacker chain can be characterized as a binomial random walk the success event is the honest chain being extended by one block increasing its lead by plus one in the failure event is the attackers chain being extended by one block reducing the gap by minus one the probability of an attacker catching up from a given deficit as analogous to a gamblers ruin problem suppose the gambler with unlimited credit starts at the deficit and plays potentially an infinite number of trials to try to reach breakeven we can calculate the probability he never reaches breakeven or than attacker ever catches up with the honest chain as follows P equals probability an honest node finds the next block Q equals probability the attacker finds the next block Q equals probability the attacker will ever catch up from Z blocks behind given our assumption that P is greater than Q the probability drops exponentially is the number of blocks the attacker has to catch up with increases with the odds against them if he doesn’t make a lucky lunch forward early on his chances become vanishingly small as he falls further behind we now consider how long the recipient of a new transaction needs to wait before being sufficiently certain the sender can’t change the transaction we assume the sender as an attacker who wants to make the recipient believe he paid him for a while then switch it back to the himself after some time has passed the receiver will be alerted when this happens but the sender hopes it will be too late the receiver generates a new key pair and then gives the public key to this shortly before signing this prevents the sender from preparing a chain of blocks ahead of time by working on it continuously until he’s lucky enough to get far ahead enough then executing the transaction at that moment once the transaction is sent the dishonest sender starts working in secret on a parallel chain containing an alternate version of his transactions the recipient waits until the transaction has been added to a block and Z blocks have been linked after it he doesn’t know the exact amount of progress the attacker has made but assuming the honest blocks tooks the average expected time per block the attackers ponine potential progress will be a Poisson distribution with expected value to get the probability attacker could still catch up now we multiply the Poisson density for each amount of progress he could have made by the probability he could catch up from that point rearranging to avoid summing the infant tale of all the distribution and in conclusion in section 12 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 active attacker to change if honest nodes control a majority of CPU power the network is robust in its unstructured simplicity nodes work all at once with little coordination they do not need to be identified since messages are not routed to any particular place and only need to be delivered on a best efforts basis nodes can leave and rejoin the network at will accepting the proof-of-work chain is 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 in the needed rules and incentives can be enforced with consensus mechanism references so things that joining us that’s an oral history of Satoshi nakamoto’s white paper from October of 2008 we hope you enjoyed this again people learn differently that some people like to hear it read to them some people like to read it themselves maybe you could put this in while you’re on a long drive and just kind of soak this all in because honestly Bitcoin and digital currencies in general are the wave of the future [Music] you