Bitcoin Years Later: Was the Nakamoto White Paper Right?

Bitcoin is more vibrant than ever. In March 2024, the cryptocurrency surged to an all-time high of $73,805, following a wave of popular and institutional interest after the Securities and Exchange Commission approved Bitcoin Spot ETPs in January. Although its price continues to rise and fall dramatically, it stubbornly resists the grave.

Bitcoin’s controversial and volatile nature has a way of obscuring the greater picture at times in favor of whatever trending news about it dominates the day’s headlines. It has been declared dead by various media outlets 476 times, at last count in March 2024.

So, examining its white paper and origins is a great exercise in understanding why Bitcoin persists. Satoshi Nakamoto’s blueprint describes a pure, raw Bitcoin, yet it does not anticipate many of the changes its creation endured to survive. In honor of the durable nature of Bitcoin, we take a magnifying glass to its official birth certificate to determine if the potential outlined there is matched by it years later.

Bitcoin Origins and Influence

Originally written under the pseudonym Satoshi Nakamoto, the title of Bitcoin’s white paper is deceptively simple: Bitcoin: A Peer-to-Peer Electronic Cash System. Yet, the content of this nine-page document incited what can only be described as a revolution in the world of fintech. More relevantly, Bitcoin’s white paper laid out an inspiring new definition of money at a time when faith in the traditional financial system was still being salvaged.

Satoshi launched the first Bitcoin client in early 2009 before handing the project off to the community in 2010, where it has since thrived as the open-source cryptocurrency of choice (or concern) for investors, academics, economists, financial analysts, financial institutions, governments, and many others.

Analyzing Bitcoin's White Paper

Opening the White Paper: Abstract

The 12-part white paper is headed by a brief, indented paragraph called an abstract, typical for research papers. It should be noted that not all white papers start with an abstract, but all cryptocurrency projects generally do start with one—a trend that was set by Bitcoin.

Part 1: Introduction

Bitcoin’s introduction provides a strong case for the invention of a new online payment system. At the time, people could only link their bank account or credit card or use a platform like PayPal to transact online. They needed a third-party authority figure to ensure that services delivered were paid to the right person and in the right amount. The persistent problem Bitcoin addresses is that third parties like banks and payment processors cannot reach optimum efficiency because they cannot avoid disputes. This has a two-fold effect.

First, merchants cannot be sure that they will always be paid for their services and require sensitive information from customers. Second, banks have a minimum payment size before it becomes unprofitable with their overhead. Therefore, sending small amounts of cash to family and friends online is not possible without several intermediaries, exchange fees, service charges, and other barriers. In contrast, cash paid for coffee can be verified immediately in person and at no cost.

After painting this picture, the idea of Bitcoin begins to form in the following paragraph: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” In place of the third party is an unchangeable chain of transactions that requires computational proof to sign and a system whereby a majority of connected peers are incentivized to keep the same record as the others.

In parts two through nine of the Bitcoin White Paper, Satoshi describes the basic components required to sustain the network, beginning with the broader idea of mass consensus for a digital signatures record. Each subsequent section describes what is required for the previous one, a domino-like chain of dependencies that circles back to its beginning.

Part 2: Transactions

In the second part of the white paper, the concept of the coin is finally introduced. Bitcoin is often depicted as a tangible golden coin by the media because it makes it easier to understand, but it is defined as "a chain of digital signatures" by its founding document.

Ownership of Bitcoins is only possible if a peer has sent it to you or you are awarded it by the blockchain. The transaction signature of the sender is present in each block's hash. If either of the previous conditions is true, your signature is added to the chain of signatures, and it continues, forever stored in electronic format by all of Bitcoin's participants. These chained signatures prevent double-spending; however, without a centralized system, who determines whether someone has signed their coins off to two people at once? The ingenious solution is discussed in part three.

Part 3: Timestamp Server

Though it is now commonly understood as a ledger, Bitcoin's white paper portrays the shared transaction log as a sort of timestamp server. This may sound odd, as "server" is a term usually reserved for centralized hardware, but regardless, the idea is similar.

Because the ledger is distributed, there must be a way for the network to agree on transaction history. This is made possible by requiring hashes of transactions to be timestamped on the same sheet that every other trader is using. Each new timestamp includes the previous one, creating a universally verifiable chain of events carried on ad infinitum.

Part 4: Proof of Work

The ideas set out in parts one through three are well and good, but they do not discuss how peers are supposed to go about time-stamping the ledger. This problem is addressed by a proof-of-work (PoW) system, which makes peers expend a bit of effort to identify and verify the hashes that represent blocks of transactions.

By representing a block as an SHA-256 hash, peers are required to spend computational power to produce another hash that has the number of zero bits in it that meets the target set by the network.

Solving this puzzle generates a new addition to the ledger. It is like a one-time puzzle that the computer(s) must solve using computational power. That block's hash then becomes part of every hash added afterward in a long chain of blocks that all participants agree is correct.

Part 5: Network

Participant's computers (also called nodes) must work to sign a block of transactions onto the chain, both to prove they did the work honestly and to provide the power that keeps the blockchain lights on. After sourcing enough power, a majority of participant nodes must agree that the block contains no double-spent transactions before accepting it and then must use it in the previous hash of a new block. Nodes are also designed to consider the longest chain the most official version and retroactively accept verified transactions made elsewhere on the chain.

Work is required to achieve this consensus because if it were costless to generate a block of verified transactions, then it would be hackable. It must be unfeasibly expensive to attack Bitcoin, which ends up taxing its participants. To get people to work on behalf of others using Bitcoin, they must be rewarded for doing so.

Part 6: Incentive

By now, the white paper has made it clear how a disparate group of peers is supposed to agree on the official record of their collective transactions and how they are expected to enforce it. But what is the benefit to them? This is where the idea of mining makes its first appearance, which has since become one of the most controversial Bitcoin aspects due to its rampant electricity consumption.

People who help process and verify blocks of transactions are submitting work in order to prove the specific contents of the blockchain at that point in time. By requiring large amounts of processing power, it is suddenly much too expensive for any single entity to pretend that its version of the chain is correct.

The individuals contributing power to verify any block are rewarded for their efforts. Every successfully verified block creates a certain amount of Bitcoin which is awarded to the node that added it to the ledger.

Part 7: Reclaiming Disk Space

A potential problem anticipated by Satoshi was that the blockchain might one day get too large. He illustrated the idea of using a Merkle Tree system in part seven to create a chain of referrals back to a root hash. This system helps reduce the size of the blockchain and makes it possible for devices with less storage to connect.

Part 8: Simplified Payment Verification

If basic devices can connect as blockchain nodes, then they may only be able to host the most lightweight version of the blockchain. Nodes would only need to register the latest Merkle Tree branch, rather than the entire progression of hashes, in order to complete any single transaction and correctly assume that it is connected to the root of the correct chain.

Part 9: Combining and Splitting Value

This part details an accounting rule that clears up the potential mess that could happen when people decide to transact in fractions of a Bitcoin. Because any value that Bitcoin denominates will fluctuate, single transactions by the “cent” are unfeasible. Therefore, every transaction is capable of having several inputs and outputs that allow value to be split and combined.

Part 10: Privacy

After the tech-heavy content of the first few parts of the white paper, Satoshi dials it back and discusses how banks achieve privacy for their customers, not to mention how Bitcoin might do the same.

Banks simply limit access to the transactions taking place, and they are the only ones to record the participants' identities. Bitcoin, with the condition of publishing each transaction as it happens in real time, cannot keep anything below the table.

Therefore, users on the blockchain must use a public key to identify themselves to the network and an associated private key to sign the coins sent to them. This allows them to keep their identity safe while still verifying it on any transaction.

Part 11: Calculations

Satoshi needed closure on the idea of an impenetrable network, one unable to be attacked by bad actors. They outline the math that makes this proposition an extremely unlikely one in part 11.

The first thing to understand is that even if someone manages to create a chain rivaling the honest one, they would not be able to create Bitcoin from thin air because honest nodes will not accept an invalid transaction (one that does not match).

All they can do is race the honest chain to be the longest and erase their own transactions from the block they create. Statistically, this is impossible because the longer the chain is before a dishonest actor begins competing with it, an exponentially greater amount of processing power will be needed to catch up.

Part 12: Conclusion

This closes the loop on Bitcoin. The final part of the white paper zooms back out. It illustrates to the reader why each piece of Bitcoin’s delicately balanced ecosystem is necessary and how they all work together to provide a truly trustless payment solution.

What Changed Since 2008 and 2009?

Bitcoin’s lifespan contains an enormous history of ups and downs, both in terms of its dollar price as well as its development and support. For an idea that started as an anonymous research paper, its reputation and large market capitalization are astounding. To enjoy these accomplishments, Bitcoin had to endure several diversions from its original white paper:

• Mining centralization: Bitcoin’s popularity drove its price up, which made mining very lucrative. Though the network is designed to be decentralized, those with enough money built large mining facilities in areas that subsidize electricity, thereby concentrating an important source of Bitcoin’s power into the hands of a few.
• Incentives: Part six of the white paper outlines the rewards to miners, but even the largest are not immune to market forces. Mining Bitcoin gets progressively harder as the network grows, and so eventually, mining it en masse requires a lot of hardware, electricity, and cooling. This creates a breakeven point for mining, which is a factor that was not anticipated in the white paper.
• Blockchain’s size: Part seven of the white paper is about keeping blockchain’s size at a minimum, and so far, it’s done a decent job. However, at around 558 GB as of March 23, 2024, it is a significant storage burden.
• Privacy: Satoshi illustrates his vision for private transactions in part 10, but Bitcoin is now only private for those who take great caution to ensure their anonymity. Most Bitcoin is now traded between centralized exchanges that require identification (and occasionally bank account verification), so it is not difficult to trace to whom it belongs or where it is going. Bitcoin’s speculation-fueled popularity put it in the spotlight of government and central banks long ago. Though people understand institutional finance cannot ever destroy Bitcoin entirely, at this point, it is as much a part of Bitcoin as regular users are. 
• Speed and Fees: Bitcoin’s core development team has made changes to its code over time to address problems with transaction speeds and costs. They have altered the size of blocks being verified and opened up pathways for integration with off-chain solutions like the Lightning Network. Whether these side chains or second-layer solutions will pay off in the long run remains to be seen.

Bitcoin Persists

The many varying opinions on how best to operate Bitcoin mean that its family tree is enormous, but the primary coin is still the king. In terms of developer support for Bitcoin and the ecosystem that has grown around it, its market cap, and the recognition it has earned on a global scale, there is no arguing that Bitcoin is a force with momentum. Its community and fans fight fiercely in pursuit of its original vision, more so than most open-source projects.

The Bottom Line

The idea of distributed payment tech is now a popular idea and will doubtlessly survive in some form moving into the next decade. For now, however, it is a good bet that Bitcoin will have many birthdays to come.

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