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7 Lessons from the White Paper on Bitcoin

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Today, October 31, 2022, marks 14 years since someone under the pseudonym “Satoshi Nakamoto” published the paper “Bitcoin: a peer-to-peer electronic cash system.”

The White Paper on Bitcoinas it is known, lays the foundation for this decentralized digital cash network. Below, as a tribute and anniversary celebration, CryptoNews shares 7 lessons this text leaves for its readers.

Lesson 1: What Bitcoin is and what it is not.

Right from the title, the white paper defines. what bitcoin is. According to Nakamotois a peer-to-peer electronic money system.. As long as Bitcoin is able to perform this function, it is a successful product.

Also excluded from this definition are many expectations of what Bitcoin should be (or do), which may be valid, but are not part of its essence or the reasons why it was created.

For example, the bitcoin currency (BTC) has a variable and volatile price. Often, when its price falls, the press headlines “Bitcoin has been a failure,” or “Bitcoin has been a failure.” “Bitcoin is dead.”or “Bitcoin failed.”

This is all false. Bitcoin is still a peer-to-peer electronic money system, even if its currency is worth $60,000, $20,000 or $1.. Bitcoin is not defined as a financial asset whose function is to increase the wealth of its holders (although so far, in the long run, it has done so).

graph of the price of bitcoin from its beginnings to the present.
Despite high volatility over short periods, over the long term the price of BTC has been on an upward trend since its inception. Source: CoinMarketCap.

It is possible to invest in bitcoin, use it for tradingarbitrage its price, and so on. Bitcoin is a tool and any user can find ways to profit from it, which is very valid. But the white paper clarifies what Bitcoin really is. Over the past 14 years, its development and the new technologies and improvements that have emerged around this network (e.g. Taproot or Lightning network) point to transform Bitcoin into a better peer-to-peer electronic cash system.

Lesson 2: Bitcoin rests on the shoulders of giants.

More than inventing a new technology, the work of Nakamoto in thinking about Bitcoin was to bring together pre-existing technologies that had been designed by other people. In the White Paper on Bitcoin, the author credits people like Adam Back for its developments, Xavier SerretWei Dai and Ralph Merkle, among others.

In cryptopedia (CryptoNews educational content). “How Bitcoin was born.” details the emergence of proof-of-work, with HashCash; the important antecedent of B-Money; the relevance of Merkle trees; the need for timestamps; and the use of cryptographic technology that has been under development for several decades.

The genius of Satoshi Nakamoto was to adjust the difficulty and other strategies, find a way to amalgamate all these developments.

Lesson 3: Bitcoin is simple

Bitcoin is a revolutionary tool that changes the way money is understood. One aspect that has helped to achieve this is that it is simple to understand.

A 12 sections of the white paperwith a few paragraphs each, Nakamoto clearly explains how his digital currency works. Although he includes several technical concepts, lines of code and mathematical expressions that are beyond anyone’s understanding, the basics of Bitcoin are more than clear.

Anyone who has read the Bitcoin white paper in detail several times will understand that. development is legitimate and leaves no room for suspicion. This is not the case with white papers of all cryptocurrencies, which often add concepts of such complexity or length (e.g., that of Ethereum) which makes it very difficult to understand.

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Lesson 4: It is almost impossible to hack Bitcoin.

One of the biggest fears of first-time Bitcoin users is the possibility of the network being hacked and the security of their money being breached. Nakamoto, thinking about Bitcoin, did not rule out the possibility of malicious parties trying to damage the network. In addition, has come up with some ways to avoid such a thing.

Exactly one year ago, CryptoNews published the story “The cruel anti-hacker lessons of the white paper on Bitcoin“. This journalistic text tells how “Bitcoin’s rules of the game shatter attackers’ illusions.”

Nakamoto, in the white paper, wrote:

“Incentive can help encourage nodes to remain honest. If a greedy attacker is able to assemble more CPUs than all the honest nodes, he will have to choose whether to use them to defraud citizens by stealing their payments, or use them to generate new coins. He should find it more profitable to play by the rules, rules that favor with more new coins (…) rather than undermine the system and the validity of his own wealth.”

Satoshi Nakamoto, creator of Bitcoin.

If someone tried to trick the majority of Bitcoin miners (e.g., to censor or cancel transactions). would require enormous computing power to perform what is called a 51% attack.

The page Crypto51 shows that, at the time of publication, such an attack would cost about $1 million per hour. This is in addition to the cost to the attacker of purchasing the mining equipment, which, according to the website GoBitcoinwould be more than $41 billion.

An attack of this magnitude could only be paid for by one state. (assuming its Central Bank could print such an amount of currency without depreciating in value).

Hacker targeting a bitcoin coin with overlay code.
The likelihood of bitcoin being hacked is minimal, both because of its technological design and economic incentives. Source: bits and splits/ stock.adobe.com.

In addition to the above, there is the fact that Existing miners may not recognize the attached Bitcoins as valid. As summarized in the aforementioned CryptoNews article, “nodes would never accept a history of new transactions that do not match those on their blockchain.” The attacker has a high probability of failure because he starts mining later than the miners already active on the network.

In the words of Bitcoin’s white paper, given the assumption that the honest chain is larger than the attacker’s, “the probability [de un ataque exitoso] decreases exponentially as the number of blocks the attacker has to reach increases.”

To all this should be added that, in the unlikely event that someone were to achieve enough computing power to dominate the Bitcoin network, it would be be more profitable to use this power to mine than to attack and damage it.

Lesson 5: Using Bitcoin involves taking individual responsibility.

Nakamoto, in the introduction to the Bitcoin White Paper, describes one of the advantages of using this digital currency:

“(…) 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.”

Satoshi Nakamoto, creator of Bitcoin.

Not only that, but also it is possible to “store” bitcoins (BTC) without having to use a financial institution or a trusted third party. In other words, With bitcoin, a person can be his own bank.

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LBitcoiners need not fear “financial corralitos,” confiscations, safe deposit box theftsand many other things that can happen to fiat money when stored in banks.

But all these advantages of bitcoin disappear if you give up the custody of private keys. of bitcoin to another person or entity. Many people, out of convenience or ignorance, buy BTC from a broker and exchange and keep it there, without withdrawing it at a self-custodied wallet. Others voluntarily surrender BTC to some platform that offers them some interest for coin deposit. In this way, the maxim of “being one’s own bank” is nullified.

Cold wallet for secure storage of bitcoin and other cryptocurrencies.
Hardware wallets (photo) are a secure way to store bitcoin’s private keys. Source: mingis/ stock.adobe.com

As reported by this media outlet, many bitcoin exchanges have been hacked.or companies that went bankrupt and lost, perhaps forever, their customers’ money.

“We have proposed a system for electronic transactions that is not based on trust.”Nakamoto states in Bitcoin’s white paper. It is up to users to make it a reality.

Even the use of Bitcoin requires being responsible in terms of security. How private keys are stored (ideally offline and away from the reach of anyone else) is critical to preventing a person’s BTC from getting into the wrong hands (or wallets, rather).

Unlike banks, Bitcoin does not have a complaint hotline with operators to consult in case of problems. There is no Bitcoin support service to retrieve lost private keys. For this reason, Education is necessary, and without it, mistakes are very likely to be made.

Lesson 6: Bitcoin privacy depends on user attention.

Bitcoin is a transparent network, which means. everything that happens on it is visible to anyone. Using block explorer, you can view the balance of any Bitcoin address, see which addresses have sent money and which payments have been made.

For all this, Anyone interested in maintaining a high level of financial privacy should take precautions. to avoid, for example, having their identity associated with a particular address. Nakamoto, aware of this, wrote the following advice in the Bitcoin White Paper:

“(…) a new key pair must be used for each transaction to avoid linking them to the same owner. Some linkage remains unavoidable with multiple-entry transactions, which necessarily reveal that their entries belonged to the same owner. The risk is that if the owner of a key is revealed, the linkage could reveal other transactions owned by the same owner.

Satoshi Nakamoto, creator of Bitcoin.

There are companies that specialize in blockchain analysis that, through complex software and computational resources, are able to infer that multiple addresses belong to the same entity (which can be a person or an organization).

For all this, there are some best practices that can be adopted when using Bitcoin (if you have an interest in preserving financial privacy). For example, Buy BTC using methods that do not require identification.

Also different portfolios can be used (or multiple accounts in the same portfolio) for various purposes. For example, one wallet for interacting with exchanges, one for making payments at merchants, one for p2p transactions, one for long-term savings, and so on. This will make it more difficult for an eavesdropper to find out how many BTC a particular person owns and what he or she used them for.

Lesson 7: Proof of work makes Bitcoin a fair and secure network.

“We will have to use a proof-of-work system similar to Adam Back’s Hashcash,” wrote Satoshi Nakamoto in the Bitcoin White Paper.

As CryptoNews explains in its article on. consensus algorithmsproof of work “Aims to encourage honest behavior by participants in a networkby requiring them to do considerable but achievable work (what they usually call a computational puzzle) in processing information.” Bitcoin’s white paper explains some of the problems that the chosen consensus method solves:

“Proof-of-work solves the problem of determining representation in majority decision making. If the majority relied on one IP address for a vote, it could be subverted by anyone capable of assigning many IP addresses. The proof of work is essentially a CPU-one vote. The majority decision is represented by the longest string, which invested most of the proof-of-work effort. If most of the CPU power is controlled by honest nodes, the honest chain will grow faster and outperform any competing chain. To modify a past block, an attacker would have to redo the proof-of-work of the block and all subsequent blocks, and then recover and overtake the work of the honest nodes.”

Satoshi Nakamoto, creator of Bitcoin.

In Bitcoin, proof of work rewards those who execute it with BTC.. Mining, as this activity is called, is not only for validating transactions and adding them to a ledger, but also for generating new BTC.

Bitcoin mining is currently done with specialized ASIC equipment (photo). Source: artiemedvedev/ stock.adobe.com

Those who allocate more computing power to the network receive greater benefits. Those who have been doing this work longer may have accumulated more BTC than new miners.

“Incentive can help encourage nodes to stay honest. If a greedy attacker is able to accumulate more CPU power than all honest nodes, he will have to choose whether to use it to defraud citizens by stealing their payments or use it to generate new coins. He should find it more advantageous to play by the rules, rules such that he is favored with more new coins than everyone else combined, rather than undermining the system and the validity of his own wealth.”

Satoshi Nakamoto, creator of Bitcoin.

Different is the case with other consensus algorithms such as proof-of-stake (PoS). which relies only on money, without the need for computational effort. According to several critics, this makes networks employing such a protocol (as in the case of Ethereum after the merger) much more vulnerable to censorship.

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It is easier for a state to acquire tokens that give it governance of a network (which it could obtain on the basis of a monetary issue) than to acquire the amount of computational power needed to dominate it.

On the other hand, unlike the cryptocurrencies launched years later, In Bitcoin, there are no pre-extracted coins or tokens that have been assigned to developers. There has also been no pre-sale of low-priced coins. All BTCs in circulation (and those yet to be issued) are the product of a person or entity contributing computing power to the network, thus making Bitcoin more secure.

White paper points the way for Bitcoin

Bitcoin has a long way to go. If you look at it from a historical perspective, it is a new technology that still has a long way to go.

It is possible that new developments will develop around Bitcoin, new proposals for improvements will be implemented, new use cases will emerge, new states will adopt it as legal tender (and as many will ban it), and so on.

But, like an immovable rock, the white paper will remain unchanged and will continue to point the way forward for the realization of Bitcoin.: a peer-to-peer electronic cash system.

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