A Prelude To Bitcoin (Article 5)
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In order to gain a deeper understanding of Bitcoin, it is important to understand the foundational developments and the essential literature that led to the later development of Bitcoin. The origins are primarily grounded in two fields of computer science: cryptography and cyber security.
The story can be traced back to the year 1874 when William Stanley Jevons wrote in his book ‘Principles of Science’
‘Can the reader say what two numbers multiplied together will produce the number 8616460799? I think it unlikely that anyone but myself will ever know.’
What William did there is describe the one-way function, which is the function that asymmetric cryptography is based on. Asymmetric cryptography, or public-key cryptography, is a cryptographic system that uses a pair of keys, one is a private key, and the other is a public key. As the names imply, the private key is kept secret, but the public key is made public to everyone. One key is used for encryption, while the other is used for decryption.
Asymmetric cryptography was deemed possible in the year 1970 and was first implemented a few years later. Asymmetric cryptography is the encryption system used in blockchains, where private keys are used for signing transactions and the public key is used for confirming the signature and validating transactions. The use of the public key as a digital identity was not an invention that emerged with the development of Bitcoin or blockchain, but it goes back to academic research in the early 1980s. Therefore, Bitcoin is built on 4-decade old research, which itself is built on a 100-year-old description of the one-way function.
Following this, the year 1980 saw the introduction of the Merkle tree data structure concept. Merkle trees allow the grouping of information together in a concise way that resembles branches coming together to connect at one tree trunk (depicted below). Merkle tree is the method used to group multiple transactions together to be hashed, or encoded, into a block. The use of Merkle trees allows for the scalability of blockchains, and without it every block would be limited to only one transaction.
The 1980s was a very fruitful period in the field of cryptography. Besides Merkle trees and the use of public keys as digital identities, the Byzantine generals problem was introduced, and this, in turn, resulted in the development of some Byzantine fault tolerance systems. In addition, at least 2 forms of digital currency were implemented. These and similar developments in the field sparked more interest in centralized and decentralized digital currencies.
The 1990s saw the introduction of 3 further key elements for cryptocurrencies: 1) proof-of-work (PoW), 2) smart contracts and 3) blockchain. Let’s look at all three in some detail:
- PoW was introduced as an anti-spam mechanism, which is implemented as is in Bitcoin, except for the difficulty of the PoW problem. PoW was added to email services and required them to solve a computational problem that would take a few seconds before an email could be sent. For any user that sends out emails in a normal fashion, the delay is tolerable and does not cause any practical problem. However, a spammer trying to send 1000s of emails will encounter a huge delay that renders spamming impractical. This very same concept is implemented in Bitcoin, however, here a PoW needs 10 minutes on average to be solved.
- Smart contracts, which were proposed by Nick Szabo, are an automated protocol for the execution of contracts once the contractual conditions are satisfied. Szabo mentioned the use of smart contracts in digital currency, but also entertained the possibility of using them for different purposes, including linking them to the ownership of physical assets.
- The first and longest in time blockchain was introduced in 1995 by 2 cryptographers: Stuart Haber and Scott Stornetta. They developed a blockchain to authenticate digital documents using timestamping. They hashed (encoded) digital documents and published the hash weekly in The New York Times newspaper. The published newspaper works as a timestamp that is tamper-proof. Since it uses the physical newspaper for distribution, this concept of blockchain depends on non-digital timestamping.
As illustrated thus far, all the elements currently used in Bitcoin were developed and implemented decades before the introduction of Bitcoin; also, other digital currencies came into existence before bitcoin. Not only digital, but all currencies need to find a solution to the Byzantine Generals Problem. Fiat currency and some digital currencies resorted to centralization and depended on a trusted third-party to prevent double-spending. Some digital currencies implemented Byzantine fault tolerance systems to overcome the trust problem. However, some Byzantine fault tolerance systems couldn’t solve the double-spending problem, while other solutions did solve the problem but could not be scaled up to larger networks.
Then, in 2008, Satoshi Nakamoto innovatively combined all the parts mentioned earlier, and then came up with the Nakamoto consensus, which uses an economic incentive — a reward in return for mining a block — to solve the double-spending problem.
