Bitcoin: A Peer-to-Peer Electronic Cash System

Traditional online payment systems depend on financial institutions to act as trusted third parties. When someone makes an online transaction, banks and payment processors like PayPal or Visa are responsible for verifying, approving, and processing payments. While this system has worked for decades, it comes with significant downsides. First, it relies on trust—users must trust that banks will not freeze their accounts, delay transactions, or unfairly charge fees. Second, chargebacks are common, meaning transactions can be reversed after completion, creating problems for merchants who risk losing money to fraud. Additionally, centralized control means governments or financial institutions can censor transactions or restrict access to funds.

Satoshi Nakamoto's Bitcoin whitepaper proposes an alternative: a peer-to-peer electronic cash system that removes the need for banks and third parties. Instead of relying on a trusted institution, Bitcoin transactions are verified through cryptographic proof and recorded on a decentralized public ledger, the blockchain. This allows people to send and receive money directly, eliminating issues like chargebacks, censorship, and excessive transaction fees.

A Bitcoin transaction is fundamentally a transfer of ownership. Each transaction is secured using digital signatures, ensuring that only the rightful owner can authorize a transfer. When someone sends Bitcoin, they sign the transaction with their private key, a secret cryptographic code that proves ownership.

One major challenge in digital currency is double-spending, where someone tries to spend the same unit of money twice. Unlike physical cash, which is impossible to duplicate, digital money can be copied and used repeatedly unless a system is in place to prevent it. Bitcoin solves this with its public blockchain, where every transaction is announced to the entire network and confirmed by multiple participants. Once a transaction is verified, it is permanently recorded, making it impossible for the sender to use the same Bitcoin again.

For Bitcoin to function correctly, transactions must be processed in the correct chronological order. The Bitcoin network uses a timestamp server, which takes a hash (a cryptographic summary) of a group of transactions and timestamps it. This timestamp is then published publicly, proving that the transaction existed at that specific moment.

Every new Bitcoin block contains a reference to the previous block's hash, creating a continuous chain of records. This ensures that once a transaction has been added to the blockchain, it is permanent and cannot be changed. This structure makes Bitcoin highly resistant to fraud or manipulation.

The Bitcoin network relies on Proof-of-Work (PoW) to validate transactions and protect the blockchain from manipulation. PoW is a system where miners (participants running powerful computers) solve complex mathematical problems to add new blocks to the blockchain. The first miner to find a solution gets to add the next block and is rewarded with new bitcoins and transaction fees.

This process serves a critical security function. Changing any past transaction would require recalculating all previous blocks, an astronomically difficult task requiring massive computational power. This makes hacking or rewriting Bitcoin’s history practically impossible unless an attacker controls more than 50% of the total network’s computing power—a scenario that is both unlikely and prohibitively expensive.

The Bitcoin network operates as a peer-to-peer system, meaning there is no central authority managing it. Instead, transactions are broadcast to all nodes (computers running Bitcoin software), and the network collectively decides which transactions are valid.

When a miner successfully solves the PoW puzzle and proposes a new block, other nodes verify that all transactions within it follow the rules. The network follows a simple consensus rule: the longest chain with the most accumulated proof-of-work is considered the valid blockchain. This ensures that the system remains decentralized, as no single entity can override the consensus of the network.

Bitcoin miners play a crucial role in securing the network, and they are incentivized through block rewards and transaction fees. When Bitcoin was first launched, miners received 50 BTC per block. However, Bitcoin has a built-in supply limit of 21 million coins, so mining rewards halve every 210,000 blocks (approximately every 4 years). This event, known as the Bitcoin Halving, reduces the new supply of Bitcoin, making it scarcer over time.

In addition to block rewards, miners earn transaction fees from users who pay to have their transactions included in blocks. Over time, as block rewards decrease, transaction fees will become the primary incentive for miners, ensuring the network remains secure even after all 21 million bitcoins have been mined.

One concern with Bitcoin is that as more transactions occur, the blockchain grows in size, requiring more storage. To manage this, old transaction data can be pruned (compressed) while keeping essential information. This allows nodes to validate transactions without needing to store every single detail from Bitcoin’s history.

Pruning helps keep the network efficient and scalable, allowing users to participate in Bitcoin without needing powerful computers or extensive storage space.

Not all users need to run a full Bitcoin node. Simplified Payment Verification (SPV) allows users to verify transactions without storing the entire blockchain. Instead of downloading full transaction details, SPV wallets only download block headers (small summaries of each block), making them lightweight and fast.

SPV enables people to use Bitcoin on mobile devices or low-power computers while still ensuring transaction validity and security.

Bitcoin transactions can include multiple inputs and outputs, allowing users to combine or split Bitcoin balances efficiently. If a user has multiple small amounts of Bitcoin from different sources, they can combine them into a single output. Likewise, if they need to send Bitcoin to multiple recipients, they can create a single transaction with multiple outputs, reducing costs and improving efficiency.

Bitcoin offers some level of privacy, but it is not fully anonymous. Transactions are recorded on a public ledger, but instead of real names, users are identified by Bitcoin addresses. While this provides a degree of privacy, anyone analyzing the blockchain can trace transactions and potentially link addresses to real-world identities.

To improve privacy, users can:

• Use CoinJoin services to mix transactions.
• Use wallets that enhance privacy, such as Samourai Wallet.
• Use Tor or VPNs to mask their IP address.

Bitcoin is highly secure because changing any past transaction requires enormous computational power. The system is designed to be resistant to various attacks:

• 51% Attack: If an attacker controls more than 50% of mining power, they could rewrite history. However, this is economically impractical because doing so would cost billions of dollars.
• Sybil Attack: Flooding the network with fake nodes. However, Bitcoin's security comes from computing power, not the number of nodes, making this attack ineffective.

Bitcoin’s security grows stronger over time as more participants join the network.

Bitcoin is more than just a digital currency—it is a revolutionary technology that enables permissionless, borderless, and censorship-resistant transactions. Unlike fiat currencies controlled by governments, Bitcoin’s fixed supply and decentralized nature make it a powerful store of value.

Satoshi Nakamoto’s whitepaper has paved the way for the global adoption of decentralized finance (DeFi), and Bitcoin continues to grow as a digital alternative to traditional money.