The Engineering of Bitcoin

1- Prevent The Copying of Coins

The first and most obvious problem of creating a digital monetary system is ensuring that the coins can´t be copied freely. The digital realm allows for the the creation of perfect copies of almost anything, and any currency that can be copied infinitely would be worthless.

Traditional vs cryptographically secured database
Antique Accounting Ledger

2- Resist Censorship

Distributed Software

3- Issue Accounts and Sign Transactions Without a Central Authority

  • It is possible to derive a public key from the private key but it is impossible to derive the private key from the public key.
  • It is infeasible to guess someone’s private key. The potential number of private keys is so large that the probability of someone guessing it is equal to the probability of guessing the position of a single atom in the observable universe.

4- Update the Ledger (Blockchain) Without a Central Authority

In the traditional financial system, central authorities such as banks are in charge of editing the ledger of showing the balance of each account. So far, we have seen how the Bitcoin software validates the ownership of funds by using asymmetric cryptography and prevents censorship by having a distributed ledger formed by blocks of transactions linked cryptographically to make any tampering of past data evident.

Proof of Work mining illustration
  • If a miner mines a block that doesn´t follow the rules of the system (for example by spending the same coins more than once), it will be rejected by the rest of the nodes and they won’t receive a reward. Miners are disincentivized from sending invalid blocks since they would be incurring a cost and would gain nothing in return.
  • If a miner tries to censor certain transactions they will receive a lower reward and the transactions will be included by the next miner to identify a valid nonce.
The chain with the most Proof of Work is always the valid chain
  1. Proof of Work disincentives malicious behavior, since attempts to attack the network are costly and yield no reward.
  2. Proo of work timestamps transactions without an external source of time.
  3. The longest chain rule allows all network participants to agree on the true version of the ledger trusting physics instead of a third party.

5- Decentralized Money Supply Management

Conclusions

Satoshi Nakamoto wasn´t a random programmer who woke up one morning and had the idea to invent a decentralized monetary system. His work stands on the shoulders of giants, he built Bitcoin by combining a series of pre-existing technologies with the right balance of incentives that lead to a robust and game theoretically sound system:

Engineering of Bitcoin: Main Challenges and Solutions

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