Bitcoin: A Peer-to-Peer Electronic Cash System

Satoshi Nakamoto

Unknown Affiliation

Abstract

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. This paper introduces a solution to the double-spending problem using a peer-to-peer network. Transactions are timestamped into a continuous chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

1. Introduction

The need for an electronic payment system based on cryptographic proof instead of trust allows any two willing parties to transact directly without the need for a trusted third party. Digital signatures provide part of the solution, but the main benefits are lost if a trusted party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.

2. Background

Before diving into the Bitcoin system, it's essential to understand the underlying technologies and challenges, such as cryptographic hashes, digital signatures, and the double-spending problem.

Figure 1: Simplified Bitcoin Blockchain

Image

A simplified diagram of the Bitcoin blockchain structure.

3. Bitcoin System Overview

Bitcoin operates as a decentralized network where transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. The system relies on cryptographic proof-of-work to achieve consensus and maintain the integrity of the ledger.

4. Transaction Model

Transactions in Bitcoin are structured as 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.

Listing 1: Simplified Bitcoin Transaction

{
    "prev_tx": "abcd1234...",
    "outputs": [
        {
            "value": 0.5,
            "scriptPubKey": "OP_DUP OP_HASH160 <PubKeyHash> OP_EQUALVERIFY OP_CHECKSIG"
        }
    ],
    "inputs": [
        {
            "txid": "1234abcd...",
            "vout": 0,
            "scriptSig": "<Signature> <PubKey>"
        }
    ]
}
\[h = H(m)\]

Where \( h \) is the hash output, \( H \) is the cryptographic hash function, and \( m \) is the input message.

5. Proof-of-Work

To implement a distributed timestamp server on a peer-to-peer basis, Bitcoin uses a proof-of-work system. This involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits.

\[H( ext{nonce} \parallel ext{prev\_hash} \parallel ext{tx\_list}) < ext{target}\]

Nodes must find a nonce that satisfies the condition, ensuring the difficulty of modifying the blockchain.

6. Security Considerations

The security of the Bitcoin network relies on the assumption that honest nodes control more CPU power than any attacker. Various attacks, such as the 51% attack, are considered and mitigated through the proof-of-work consensus mechanism.

7. Conclusion

Bitcoin presents a decentralized solution to the double-spending problem using a peer-to-peer network and proof-of-work consensus. It enables online payments without a trusted intermediary, opening possibilities for new financial innovations.

References

  1. [1] Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org.
  2. [2] Antonopoulos, A. M. (2017). Mastering Bitcoin: Programming the Open Blockchain. O'Reilly Media.
  3. [3] Bonneau, J., Miller, A., Clark, J., Narayanan, A., Kroll, J. A., & Felten, E. W. (2015). SoK: Research Perspectives and Challenges for Bitcoin and Cryptocurrencies. In 2015 IEEE Symposium on Security and Privacy (pp. 104-121).
  4. [4] Conti, M., Kumar, S., Lal, C., & Ruj, S. (2018). A Survey on Security and Privacy Issues of Bitcoin. IEEE Communications Surveys & Tutorials, 20(4), 3416-3452.