Bitcoin’s Historical Background

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Bitcoin (source: newscientist.com)

What is Bitcoin’s Historical Background?

The name Satoshi Nakamoto is closely associated with being the grandfather of cryptocurrency. To date, it is unclear if the name Satoshi Nakamoto refers to one person or perhaps a group of people. Indeed, there are many theories behind whether Satoshi was a single computer programmer, a group of development engineers, or a fictitious group of corporate entities.

As such, the actual identity of Satoshi Nakamoto has not been confirmed. What is known, however, is that Satoshi Nakamoto published a Whitepaper that provided the genesis for cryptocurrencies as they exist today.

It all started in 2008 when Satoshi Nakamoto published his Whitepaper entitled: Bitcoin: A Peer-to-Peer Electronic Cash System. This Whitepaper gave birth to the cryptocurrency industry of today and its importance to cryptocurrency ecosystems cannot be overstated.

In a mere eleven pages, this Whitepaper describes the use of a peer-to-peer (P2P) network as a solution to the double-spending problem. Generally speaking, a P2P network is a decentralized model whereby two individuals interact to buy and sell, goods and/or services directly with each other.

Importantly, these two individuals can interact with one another without an intermediary third-party or the use of a separate entity or transaction facilitator. Think consumer purchasers without having to pay a Visa, Mastercard, or American Express service fee.

Basically, this double-spending problem - that a digital currency or token could be reused in multiple transactions - is not present with physical currencies since a physical bill or coin can, by its nature, only exist in one place at one time.

For example, if Bob gives Jane a ten-dollar US bill, Bob no longer has the ten-dollar bill since Jane has physical possession of this bill. Assume that Bob was to offer this very same ten-dollar bill to Mike (after having already given this bill to Jane). Mike would immediately know that Bob no longer has physical possession of this ten-dollar bill.

In contrast, since a digital currency does not physically exist, using a digital currency in a transaction does not necessarily remove the currency from someone’s possession. So, if Bob gave Jane the ten dollars in digital currency, how would Mike know that Bob no longer has possession of this digital currency and was trying to double-spend this currency? Satoshi’s Whitepaper describes a mechanism that prevents this double-spending situation.

Solutions to combating the double-spending problem had historically involved the use of trusted, third-party intermediaries that would verify whether a digital currency had already been spent by its holder. In our hypothetical, this holder is Bob.

In most cases, third parties, such as banks or other financial institutions, can effectively handle transactions without adding significant risk. But, such financial institutions are not very efficient, they tack on a service fee, and they are prone to making errors.

In addition, this trust-based model still results in a potential fraud risk if the trusted third party cannot be trusted. Satoshi recognized that removing the third party could be accomplished by building cryptography into digital currency transactions. Creating, in essence, a trustless model where there is no longer a need to trust a third party.

Satoshi’s Whitepaper proposed a decentralized approach to transactions, ultimately culminating in the creation of a blockchain. Timestamps for every single network transaction are recorded and then added to the end of previous timestamps.

Transactions occurring during a given time period are collected to form blocks that are then linked together as a chain of transactions: a blockchain. This system creates an immutable historical record that cannot be changed or altered. This historical record of transactions is distributed across hundreds and thousands of computer nodes all acting in concert on the networked system.

It is therefore difficult – indeed some say impossible - for a bad actor to gain enough control of the system to rewrite the ledger to their own advantage. The blockchain records are kept secure because the amount of computational power required to reverse these records discourages potential network sabotage.

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