TL；DR:
1. The Bitcoin white paper envisions a permissionless electronic payment system without a middleman. Its value lies in being a store of value, a medium of payment, and a means to pay record-keeping fees.
2. Bitcoin addresses the double-spending problem in digital transactions by making transaction records public and timestamped, maintained by miners through a system called Proof of Work (PoW).
3. Despite challenges with transaction speed, fees, and price fluctuations, Bitcoin continues to evolve and adapt, demonstrated by developments like the Lightning Network
The Bitcoin white paper isn’t lengthy. Just 17 pages in all, it doesn’t even mention blockchain or cryptocurrency. Yet, despite the complexities of cryptography, it provides an understandable and highly enlightening read. Delving into it not only offers insight into Satoshi Nakamoto’s original vision for creating the Bitcoin network but also lets us measure our journey since the inception of Bitcoin 15 years ago.
Satoshi’s Vision: An Unrestricted Electronic Payment System
According to the Bitcoin white paper, Satoshi envisioned the Bitcoin network as a permissionless electronic payment system. Unlike traditional payment systems, online transactions between people, such as money transfers, no longer need a middleman, like a bank. As long as you have sufficient balance, your consent is all it takes to complete the payment.
The Fallacy of the “It’s for Your Own Good” Mantra
What issues plague the transaction systems we’re familiar with today? Consider this: if the money in your wallet truly belongs to you, shouldn’t you be able to spend it as you wish, without anyone else’s consent? In reality, however, centralized institutions impose various restrictions on our every online payment — like maximum transfer amounts and too many transactions. If the electronic money is truly yours, why do you need a third-party audit when transferring it to others? Why does this e-wallet restrict your right to use your assets?
Some argue that this is for security, to prevent theft. While this might sound reasonable, the truth is that we have no choice — we are denied the right to assume our own risks.
The Bitcoin white paper proposes a solution to this issue. The very title of the paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” highlights Satoshi’s core idea: a peer-to-peer electronic payment system. This concept is the foundation of blockchain, decentralization, and permissionlessness.
The Double-Spending Problem: An Impediment to Unrestricted Payment Systems
To realize an unrestricted payment system, the double-spending problem must first be solved. Double-spending refers to the same sum of money being used repeatedly. For instance, if you transfer $1,000 from account A in one bank to account B in another bank, account A would decrease by $1,000 while account B would increase by the same amount. Suppose bank A’s ledger does not deduct the $1,000 from your account. Delighted, you might go on to transfer the same money to bank C, and bank C records the incoming funds. In this case, an additional $1,000 appears to be created out of thin air.
This situation wouldn’t pose an issue in real life, as honest banks ABC would perform checks and exchange information. However, in an electronic payment system devoid of a centralized institution (like a bank), there are no such banks ABC to conduct audits. Consequently, ensuring an effective verification system to prevent the misuse of digital assets in an unrestricted electronic payment system, thereby avoiding their repeated use (double-spending), becomes a critical challenge.
The Bitcoin system, with its decentralized nature, was the first to provide a practical solution to the double-spending problem. The white paper proposes a solution by making all transaction records public and adding time stamps. This is why the Bitcoin network is seen as a time-stamped ledger. Everyone can see the bank’s transaction records, but they only see account numbers, amounts, and times, not who owns the accounts.
Miners: The Ledger Keepers
The question that arises next is: who gets the privilege of maintaining the ledger? This responsibility falls on the shoulders of miners. Unlike in traditional financial arenas where we must place our trust in banks to handle transactions correctly, on the Bitcoin network, we don’t need to trust anyone. Miners vie for the right to record transactions, with the fastest miner gaining this privilege. This concept underpins the principle of Proof of Work (PoW).
In order to entice participants to verify the validity of transactions, thus maintaining the Bitcoin ledger, the network rewards the nodes that successfully gain the right to create blocks, and the form of these rewards is Bitcoin itself. Therefore, those who maintained the Bitcoin network later came to be known as miners.
Participation in record-keeping is open to anyone without any requirement for permission. In addition to earning transaction fees, miners also receive block rewards (by creating blocks), serving as their primary source of income. As time progresses, these block rewards will decrease, and by around 2100, no more BTC will be issued — this is why the total number of Bitcoin is fixed.
The Value Propositions of Bitcoin
The value of Bitcoin lies in: 1. Its use as a value store — its quantity is fixed and will not increase; 2. Its function as a payment medium; 3. Its role in paying miners’ record-keeping fees; 4. Its use as a permissionless payment system, allowing more freedom and unrestricted use of assets.
Addressing Bitcoin’s Challenges: Speed, Cost, and Price Fluctuation
As a payment network, Bitcoin indeed encounters a few hurdles. Firstly, the transaction speed isn’t fast enough. Given that every transaction requires miner confirmation, it could take as long as 10 minutes, making the original Bitcoin network challenging to use in everyday payment scenarios. However, compared to today’s slowly developing cross-border payment networks, and considering weekends when traditional banks are closed, Bitcoin marks a significant improvement.
Secondly, transaction fees pose a problem. On the BTC network, large and small payments bear nearly the same transaction fee. In other words, transferring $1 million or $1,000 incurs the same fee. Unless transaction fees are zero, this isn’t economical for small transactions, especially in developing countries where the traditional financial system is underdeveloped.
Thirdly, the fluctuation in Bitcoin’s price. Today, one Bitcoin might be worth $28,000; tomorrow, it might rise to $30,000. This variability places both payers and recipients under significant exchange rate risk. This problem is particularly prevalent because our current societal system measures value in fiat. If everyone adopted a Bitcoin standard (where all goods and services are priced in BTC) and only switched to fiat currencies like the dollar when necessary, this issue would be mitigated (conceptually similar to how the US dollar was once pegged to gold).
Bitcoin’s Evolution: A Dynamic Network 15 Years On
Today, 15 years after the proposal of the Bitcoin white paper, this continually maintained and iterated network system is constantly evolving. It has given birth to many new ways of using the technology, including support for the Lightning Network and even Non-Fungible Tokens (NFTs) on the Bitcoin network. This ongoing evolution shows Bitcoin’s dynamic nature and its ability to adapt and innovate, maintaining its relevance in the ever-changing landscape of digital payments.
