Elon Musk talks Crypto：What is Bitcoin?v1

Bitcoin: A Peer-to-Peer Electronic Cash System

Abstract. A purely peer-to-peer version of electronic cash would allow online

payments to be sent directly from one party to another without going through a

financial institution. 

Digital signatures provide part of the solution, but the main

benefits are lost if a trusted third party is still required to prevent double-spending.

We propose a solution to the double-spending problem using a peer-to-peer network.

The network timestamps transactions by hashing them into an ongoing chain of

hash-based proof-of-work, forming a record that cannot be changed without redoing

the proof-of-work. The longest chain not only serves as proof of the sequence of

events witnessed,

but proof that it came from the largest pool of CPU power.

 As

long as a majority of CPU power is controlled by nodes that are not cooperating to

attack the network, they'll generate the longest chain and outpace attackers.

 The

network itself requires minimal structure. Messages are broadcast on a best effort

basis, and nodes can leave and rejoin the network at will, accepting the longest

proof-of-work chain as proof of what happened while they were gone.

1. Introduction

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as

trusted third parties to process electronic payments. While the system works well enough for

most transactions, it still suffers from the inherent weaknesses of the trust based model.

Completely non-reversible transactions are not really possible, since financial institutions cannot

avoid mediating disputes. The cost of mediation increases transaction costs, limiting the

minimum practical transaction size and cutting off the possibility for small casual transactions,

and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must

be wary of their customers, hassling them for more information than they would otherwise need.

A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties

can be avoided in person by using physical currency, but no mechanism exists to make payments

over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust,

allowing any two willing parties to transact directly with each other without the need for a trusted

third party. 

Transactions that are computationally impractical to reverse would protect sellers

from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In

this paper, 

we propose a solution to the double-spending problem using a peer-to-peer distributed

timestamp server to generate computational proof of the chronological order of transactions. 

The

system is secure as long as honest nodes collectively control more CPU power than any

cooperating group of attacker nodes.

2. Transactions

We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the

next by digitally signing a hash of the previous transaction and the public key of the next owner

and adding these to the end of the coin.

 A payee can verify the signatures to verify the chain of

ownership.

The problem of course is the payee can't verify that one of the owners did not double-spend

the coin. A common solution is to introduce a trusted central authority, or mint, that checks every

transaction for double spending. 

After each transaction, the coin must be returned to the mint to

issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent.

The problem with this solution is that the fate of the entire money system depends on the

company running the mint,

with every transaction having to go through them, just like a bank.

We need a way for the payee to know that the previous owners did not sign any earlier

transactions. For our purposes, the earliest transaction is the one that counts, so we don't care

about later attempts to double-spend. 

The only way to confirm the absence of a transaction is to

be aware of all transactions. In the mint based model, the mint was aware of all transactions and

decided which arrived first. To accomplish this without a trusted party, transactions must be

publicly announced [1],

 and we need a system for participants to agree on a single history of the

order in which they were received. The payee needs proof that at the time of each transaction, the

majority of nodes agreed it was the first received.

3. Timestamp Server

The solution we propose begins with a timestamp server. A timestamp server works by taking a

hash of a block of items to be timestamped and widely publishing the hash, such as in a

newspaper or Usenet post [2-5].

 The timestamp proves that the data must have existed at the

time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in

its hash, forming a chain, with each additional timestamp reinforcing the ones before it.