BITCOIN

🌐 Bitcoin(BTC) – Explained

Why Bitcoin was created?

PROBLEM WITH EXSITING PAYMENT SYSTEMS

Online payments relied on banks or payment processors as trusted third parties .
transactions could be reversed which made fraud and disputes common
Small transactions were impractical due to high fees.

GOAL

To build a peer-to-peer electronic cash system whwre payments move directly between people without banks or intermediaries.
To make transactions irreversible, secure and low cost.

AIM OF BITCOIN

To create digital money that works like cash on the internet.
To allow anyone to send payments directly without needing a bank.
To solve the double spending problem.
To achieve trust using cryptography and proof-of-work instead of central authorities.

CORE IDEAS IN THE WHITEPAPER

ELECTRONIC COINS AS SIGNATURES

Each coin is a chain of digital signatures.
Owners transfer coins by signing a hash of the previous transaction + the next owner's public key

DOUBLE SPENDING SOLUTION

PROOF-OF-WORK(PoW)

- Miners solve cryptographic puzzles to add blocks.
- The "longest chain" of blocks represents the majority of honest computing power.
- Attacks are impractical unless someone controls >50% of total computing power.

INCENTIVES

- Miners are rewarded with new bitcoins for securing the network.
- Over time, rewards decline, and fees will sustain the system

PRIVACY

- Transactions are public but identities are hidden behind cryptographic keys
- Using new keys for each transactions enhances privacy .

KEY GOALS OF BITCOIN

TRANSACTIONS AS DIGITAL SIGNATURES

Each Bitcoin is basically a chain of digital signatures.
Ownership is transferred when the current owner signs a hash of the previous transaction and the new owner's public key.
This ensures a verifiable chain of ownership without banks.

PROOF-OF-WORK(PoW)

Bitcoin uses a hash based puzzle to secure the blockchain.
Miners must find a number that makes the block's hash fall below a target value .
This requires large amounts of computing power and makes tampering very expensive .

LONGEST CHAIN PRINCIPLE

The valid blockchain is always the one with the most computtational work invested in it.
Honest miners extend the longest chain, while attackers would need more computing power than the rest of the network combined to succeed.

PROBABILITY OF ATTACKER SUCCESS

If an attacker is behind by several blocks, their chances of catching up drop exponentially.
With each new confirmation, the probability of reversing a transaction becomes extremely small
Example - With 6 confirmation, the chance of a successfull attack is practically negligible if the attacker has less computing power than honest miners.

POISSON MODEL FOR ATTACKS

The whitepaper uses a Poisson distribution to model how quickly an attacker might catch up.
The analysis shows that the more blocks conform a transaction, the safer it becomes.
This is why exchanges ususally wait for a certain number of confirmations

BLOCK REWARDS AND INCENTIVES

MERKLE TREES FOR STORAGE

Transactions inside a block are organized in a Merkle tree.
This allows old transactions to be removed without breaking the chain.
It also makes verifying a single transaction efficient without needing the full history .

SIMPLIFIED PAYMNET VERIFICATION

Lightweight clients don't need the full blockchain .
They only download block headers and use Merkle proofs to confirm payments
This allows mobile wallets and small devices to verify Bitcoin transactions securely.

STORAGE REQUIREMENTS

A block header is about 80 bytes.
With one block every 10 minutes, Bitcoin would use about 4 MB of storage per year just for headers.
This was considered tiny compared to computer hardware growth.

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