Bitcoin: A Peer-to-Peer Electronic Cash System

A paper published under the pseudonym Satoshi Nakamoto proposes a radical new framework for digital cash that does not require a financial institution intermediary. 

The paper outlines a decentralized "purely peer-to-peer version of electronic cash" that allows online payments to be sent directly between parties.

The proposed Bitcoin system aims to solve the long-standing issue of double spending in digital currency using a novel public ledger called the blockchain. The blockchain records all transactions chronologically and is secured through cryptographic proof-of-work rather than relying on a trusted third party.

Transactions are broadcast throughout the peer-to-peer network and collected into "blocks" by participants known as miners. Miners compete to create the next valid block by racing to solve a computationally intensive puzzle, with the first to find a solution winning the right to add the block to the chain. This competition incentivizes miners to secure the network.

The blockchain uses cryptographic hashes to link blocks together, creating an immutable record of all transactions. According to the paper, this makes it increasingly difficult for an attacker to modify past transactions, as they would need to redo the proof-of-work for that block and all following blocks.

The longest chain, representing the greatest proof-of-work effort, is considered the valid ledger. This novel consensus mechanism eliminates the need for a central authority. As long as a majority of the network's processing power is controlled by honest nodes, the honest chain will grow fastest and outpace attacker chains.

To incentivize network participation, new coins are introduced into the system as rewards for miners who successfully add blocks. The paper proposes decreasing the rate of coin creation over time to eventually arrive at a fixed money supply.

While transactions are public by necessity, users can maintain privacy by keeping their associated public keys anonymous. According to the paper, this level of privacy is similar to that of stock exchanges, where trade details are public but parties remain undisclosed.

The paper's novel contributions have paved the way for Bitcoin's pioneering implementation and future innovations in decentralized blockchain applications. If realized at scale, the proposed system could revolutionize online payments by eliminating the need for financial intermediaries.

https://bitcoin.org/bitcoin.pdf