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What is a Bitcoin Mining Pool? How is the Bitcoin Blockchain Different from Banking Ledgers? Can I Shop, Travel, or Gamble with Bitcoin? What is Bitcoin Double Spending?
Bitcoin Cloud Mining, Is It Worth It and Is It Safe? All this is made possible by Satoshi Nakamoto’s groundbreaking work published in 2008 which outlines what Bitcoin is and how it works. Bitcoin, as presented in the whitepaper. We provide annotations for all 10 sections of the whitepaper.
Text in italics is used to provide commentary and to distinguish the author’s views from those of Satoshi Nakamoto’s. The traditional method may work for most transactions but problems do occur when financial institutions facilitate the buying and selling of goods on the internet. Transactions can be reversed since banks must mediate disputes that inevitably arise. The reversibility of transactions becomes a problem when a provider has delivered non-reversible services. However, bank involvement costs a lot and these costs are passed on to consumers through transaction fees and other charges. Consider all the mediation and litigation expenses that pile up in a given year and you can see that transaction costs can be significant.
Moreover, if a provider completes a service he should rightfully get paid. But the current system allows transactions to be reversed, putting a service provider at risk of not getting paid. The possibility of a transaction’s reversal hangs over everyone. And that requires people to trust a third party such as banks to resolve payment disputes. Many merchants and consumers don’t want to trust a financial institution.
All this also create privacy concerns. In this section, Nakamoto outlines the limitations of the traditional payment system, and he is setting up the audience for his proposed solutions. The system accepts a certain percentage of fraud as unavoidable. Nonetheless, fraud increases everyone’s cost of doing business. Nakamoto proposes an electronic payment system that is based on cryptographic proof instead of trust. Cryptography involves the use of codes and protocols to establish secure communications. Such a system would let two parties transact directly with each other.
Peer-to-peer payments over an online network. The elimination of third parties and replacing trust with verification. Transactions would be irreversible and Nakamoto argues that irreversibility would protect sellers from fraud. Escrow mechanisms can be implemented to protect buyers.
Nakamoto believes that it’s better to verify transactions rather than trust an external third party, especially when it comes to something as important as money. The irreversibility of transactions provides confidence that the payment system as a whole is robust. Secondly, irreversibility minimizes fraud, he argues. Decentralized computers would prove the exact order of these irreversible transactions, creating user confidence that the records in the electronic audit trail, the blockchain, are valid and accurate.
In this section, Nakamoto’s description of the electronic transaction process, namely the blockchain, gets technical. A recipient of the coin, a payee, can verify the signatures in order to verify the chain of ownership. A Bitcoin doesn’t exist anywhere per se, at least not in the traditional sense of physical cash. But the difference is that a publicly-available ledger is placed right on the packing slip which shows the entire history of all prior deliveries of the same package. The information includes all originating addresses as well as timestamps detailing where and when exactly each delivery took place.