Today marks 14 years of the Bitcoin Whitepaper!
Bitcoin is now the foundation for ultimate economic freedom, and a better tomorrow. But, looking back, an important question is: How did Satoshi succeed, where many before him had failed?
What the Bitcoin whitepaper solved forever was providing a solution to the double-spending problem in a trustless environment!
Now, what is the double-spending problem?
Put simply, it is hard to verify if a person has spent a certain amount of money without a central authority.
Let’s look at how we solved this in the physical world, then turn to the digital world.
Physical world
Cash being a physically scarce object cannot be spent twice. If you hand over a rupee to the retail store counter, you simply do not possess that rupee anymore.
Digital world
This wasn’t possible without relying on intermediaries like banks. We trust that when we pay a rupee to the retail store counter, the bank will debit a rupee from our account and credit a rupee to the retail store account.
Without a central authority, it is hard to ascertain if the rupee has indeed been debited or credited. And without this constraint leading to scarcity, any digital currency is essentially worthless.
Up until Bitcoin, double-spending was the Achilles’ heel of digital currency transactions. It simply wasn’t possible for a digital system to prove two or more people didn’t spend the same money without the use of an intermediary – like a bank, government or a card company.
What made Bitcoin unique and innovative was that it didn’t try to create trust among network participants. In fact, it assumes a low-trust environment and uses cryptography to eliminate the double-spending problem.
How was this made possible?
Bitcoin was envisioned as a peer-to-peer network of computers, i.e. these computers can directly communicate with one another.
All participants on this network keep a record of time-stamped transactions- it is a way to keep track of ‘who has what at when’.
Steps:
The network has 2 types of participants: users & miners.
Users that track amount of Bitcoin they have
Miners that keep track of the state (“who” has “what” at “when”).
Say, user Raj wishes to transact, he will shout “I want to pay Simran Rs10”.
All the miners will take note of this desired transaction and write it down on their block (to make it simple, let’s visualize a block as a whiteboard). Each miner tries to solve a tough mathematical problem for their own whiteboard. Once a miner finds a solution to their problem, they go on and tell the other miners about this solution.
Other miners verify the solution & transactions on the first miner’s whiteboard. If both are valid, miners agree to link the next whiteboard to the first miner’s (to create a sequential timestamp of transactions).
At this point, Raj effectively pays Simran Rs10!
How do we keep miners honest?
Miners are incentivized to be honest 2 ways:
1. Mining fees when their block gets accepted. Thus, they’re incentivized to accept only valid transactions (else their block will get rejected by others)
2. Transaction fees for verifying transactions.
How do we keep participants honest?
Users who wish to transact with Bitcoin are ‘forced’ to be honest, as miners will not accept invalid transactions.
More importantly, they bear transaction costs, and thus are disincentivized to participate in spammy transactions.
Now, what significance does this have?
Solving the double-spend problem in the digital domain makes real-time commerce possible across the globe without limitations of
🏦Individual banking access
💴Currency denominations
🌎Geographical location
This wasn’t just a milestone achievement in computer science, but for the economy as a whole.
Only 14 years in, we can already see what a permissionless, distributed economy would look like – and what it’s impacts might be.
For anyone who understands Bitcoin, it is clear that it will not be confined to be a new feature set of the existing economy, but that it is fueling its own economy that will be built on different principles then the legacy systems.
By eliminating the need for a centralized middle-man, Bitcoin created the foundation for an entirely new infrastructure – an infrastructure that is incredibly secure by design, and one that allows it to be a protocol that allows other layers, apps & services to be built on top.
Companies like us at @gosatsapp are using bitcoin to rethink legacy financial systems – building bitcoin services that range from exchanges, that serve as basic on and off ramps for transfer of value from legacy to crypto-based systems, and back.
The programmable facets of bitcoin make all of these possible, and the greatest part is that the consumer or investor won’t even need to know that they are in fact using bitcoin.
Just like today’s internet user doesn’t understand the ins and outs of TCP/IP when they watch Netflix, the bitcoin users’ experience will someday be invisible and seamless.
Bitcoin solving the problem of double-spending has catapulted the internet one step closer to its promise of an open-information network.
By eliminating the need for trusted third-parties, Bitcoin thus becomes the foundation for the ultimate economic freedom.
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