Bitcoin Whitepaper Explained so Anyone Can Understand

Bitcoin whitepaper explainedIt’s been about ten years since Satoshi Nakamoto (not his or her real name) wrote the groundbreaking Bitcoin whitepaper, which explained for the first time how cryptocurrencies work. This whitepaper – which is still available to everyone online – has gained historical status as a document that changed the world.

The problem is it reads like a TV installation manual written by an antisocial robot. It combines the two worst jargon on the planet – financial and tech – and uses them to explain something that’s just as esoteric today as it was ten years ago.

The catch-22 is, for someone just getting into cryptocurrency, this is a perfect explainer guide, but you can’t understand what it’s talking about unless you’re already familiar with cryptocurrency. So we thought we’d break it down in terms that anyone can understand.

The context behind the Bitcoin whitepaper

Published on October 31, 2008, the Bitcoin whitepaper is in many ways a product of the 2008 financial crisis. Millions of people had just been personally victimized by big banks, and the rest were developing a healthy skepticism over whose interests financial institutions truly valued. As made clear in the paper’s introduction, Nakamoto offered these people an alternative to traditional banking.

While the Bitcoin whitepaper doesn’t attack big banks directly, it does make frequent references to avoiding financial institutions in transactions and the shortcomings of third-party interference. The theme of the paper is that transactions – and all commerce in general – would run faster and smoother if it were decentralized, not to mention being cheaper.

The main obstacle of a decentralized currency was preventing fraud. That, after all, was the main service regulatory bodies provided when it came to currency. While the state of technology in the 2000s initially opened up the possibility of a decentralized currency, it also created the problems of how to regulate currency in the digital space. And that’s precisely why the Bitcoin whitepaper was so revolutionary – for the first time, someone figured out how.

As a side note, the paper made no friends on Wall Street, and to this day big banks continue to show their dissent from cryptocurrencies.

What’s the big idea?

In short, the Bitcoin white paper explains the technology behind how to set up a network that would prevent fraud in digital currencies and thereby legitimize them. That technology, though, is a bit hard to understand, so we’ll do our best to explain it simply.

For starters, instead of relying on a third party to regulate currency, cryptocurrencies can use peer-to-peer networks (P2P) to regulate themselves. This takes the authority out of a central power and puts it in the hands of the public, removing the middleman in commerce, so-to-speak.

Cryptocurrency achieves this by creating public ledgers of all the transactions of a currency. By keeping this record public, it ensures that traders can’t use the same currency twice (known as double spending). In turn, these transactions organically determine the value of the currency – as opposed to a government influencing a currency’s value by minting more or less paper money (fiat currency).

Let’s look at how the sausage is made

Now for the technical bit. Every transaction is logged into what’s called a block. Each block contains unique and specific information about the transaction, including a timestamp, the digital signatures of the participants (but not their identities), and the cryptocurrency wallets involved.

These blocks secure this data using – take a deep breath – an asymmetric cryptographic hash function. That’s not as bad as it sounds when you break it down:

  • Cryptography is just a fancy word for code, and also where the term cryptocurrency comes from.
  • Asymmetric cryptography is when a code is broken up into two keys – one public and one private. The public key is the part that gets registered in the transaction block, but the private key is only known by the trader. When you create a cryptocurrency wallet, you get both, but you never reveal your private key to anyone else.
  • Breaking up the code into private and public keys is what allows cryptocurrencies to create a public ledger without sharing the trader’s personal account details with the world.
  • A cryptographic hash function is a type of code that turns data into a string of letters and numbers like 98b0f4b363af4aceb81bc42fd81117e1.

It’s important to note that, once created, these blocks cannot be undone. That’s a security measure to protect against hackers and retain the integrity of the currency’s value.

What’s a blockchain?

That the public ledger we’ve been talking about – that is a blockchain. What happens is a timestamp server collects and processes every transaction block created, then organizes them in chronological order into a chain. That chain of blocks is a blockchain.

The fact that blockchains are available to the public is huge, and it’s what allows cryptocurrencies to exist. For one thing, it prevents against double-spending by creating a concrete and unchangeable record of when and where everything was spent. Moreover, it offers protection against invasion: every new block that gets added to the blockchain makes it exponentially more difficult to hack.

Who or what are miners?

You may be asking yourself, who are the people that are creating these blocks? These people are called miners, but really it’s their computers that are doing all the work.

As you can imagine, creating and encrypting all this data requires a lot of computing power, so miners are the people who dedicate their hardware to the task. The Bitcoin whitepaper puts forth that the first transaction in a block should be a “new coin” created just for the miner as payment, but for ongoing labor, these miners receive fees based on each transaction they log (which is now the case).

It’s interesting to note that the Bitcoin whitepaper doesn’t actually use the word miner, but it does originate the term in the line:

The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation.

If you want to know more about cryptocurrency mining, particularly how to become a miner yourself, read our beginner’s guide on Ethereum mining.

Bitcoin specifics

Satoshi Nakamoto’s Bitcoin whitepaper isn’t very long – only nine pages – but it can get very technical. What we outlined above are the core fundamentals of how the technology works, but the paper also goes into specifics on a few peripheral areas, such as:

  • How to establish a Proof-of-Work system to deter hackers
  • A six-step guide on how to run the network
  • How miners can save disk space using a Merkle Tree
  • Implementing automatic protections against anticipatory attacks
  • How to combine and split values for each transaction
  • A section on maintaining the privacy of the traders
  • A series of calculations to prove that it becomes “computationally impractical” for hackers to change transactions

To be honest, though, those areas of cryptocurrency aren’t necessary to perform basic trades and exchanges. It’s reassuring to know that the information is there if one chooses to go further down the cryptocurrency rabbit hole, but what we discussed in this article will be enough for most people.

That about covers the need-to-know basics of the Bitcoin whitepaper, just in time to celebrate its tenth anniversary. If you’d like to know more read our beginner’s guide on how to get started in cryptocurrency.

Freelance writer specializing in business and marketing. I’ve been creating online content for more than ten years, and I love writing about cryptocurrency for the same reasons you like reading about it.