10 years celebration of the Bitcoin White Paper

Today, it's 10 years ago Satoshi Nakamoto published the Bitcoin White Paper, but to understand the impact of the blockchain revolution, some important persons, concepts and definitions must be known.

It All Started With a Timestamped Document

The person next to me on the picture is Dr. W. Scott Stornetta, and he is a key figure in this context. First time the blockchain was presented as a protocol was in 1991 in an article by W. Scott Stornetta and Stuart Haber dealing with the challenges on how to time-stamp a digital document:

“The prospect of a world in which all text, audio, picture, and video documents are in digital form on easily modifiable media raises the issue of how to certify when a document was created or last changed. The problem is to time-stamp the data, not the medium. We propose computationally practical procedures for digital time-stamping of such documents so that it is infeasible for a user either to back-date or to forward-date his document, even with the collusion of a time-stamping service. Our procedures maintain complete privacy of the documents themselves, and require no record-keeping by the time-stamping service” [1].

In 2008, Satoshi Nakamoto developed this idea further by presenting a new protocol for a cryptographic distributed trust technology, that aimed to create an open and decentralised financial network. The new protocol was called ”Bitcoin: A Peer-to-Peer Electronic Cash System”.

The new network should be with no central server and outside the power and control of centralised state-authorities’ interactions.

Instead of a regulated closed monetary system (with third party access to monitor every single transaction), it should be run as an open and decentralised record of peer-to-peer transactions. And instead of intermediaries and handling agents, it should be run and maintained by the parties using the network, giving all participants an incentive to support the system.

Basic Concepts and Definitions

Satoshi Nakamoto’s idea was based on some technical concepts, that have been further developed, and these concepts are in the following defined as follows:

• #Nodes: Any computer that connects to the network is called a node. Most nodes are performing rule verification and routing the data to peer connections. Nodes, that fully enforce all of the rules in the network, are called full nodes. Every full node can validate transactions.
• #Transaction: A transaction is a transfer of value, that is submitted by a node to the network and collected into blocks. When submitted, the transaction is disseminated to all other nodes in the network. The nodes on the network then receive, process and validate each transaction. A validated transaction is not encrypted, so it is possible to browse and view every transaction collected into a block. Once a transaction is buried under enough confirmations, the transaction record can be considered irreversible.
• #Block: Transaction data is permanently recorded in files called blocks. Every block contains a hash of the previous block, including a random number known as a nonce.
• #Hash: A hash function is a mathematical algorithm solved by miners that maps data of arbitrary size to a bit string of a fixed size. It can be a picture (the input data) that is converted with a hash-function called SHA-256 into a string of numbers expressed in hexadecimal (the output data). The input data is often called the message, and the output is often called the hash value. The hash value uniquely identifies a piece of digital content (e.g. the picture) with a unique number (a string of letters, numbers and other symbols), that can be applied to only that specific content. If a small pixel in the picture is changed, it will no longer be identical with the unique number that is stored as the hash value in the blockchain.
• #Blockchain: A blockchain is an electronic distributed ledger or list of entries shared by all nodes participating in a system based on the same protocol. Each block in the chain is guaranteed to come after the previous block chronologically, because the previous block’s hash value validated by miners using mathematical algorithms would otherwise not be known. Some examples of blockchains are the Bitcoin and Ethereum blockchains.
• #Mining: Mining is the process of adding transaction records to the ledger of past transactions. Mining allow nodes to reach a secure and tamper-resistant consensus. Not all nodes are mining (but instead doing peer-to-peer rule verification).
• #Miners are independent service providers with servers and computers, that host the decentralised network, handles mathematical algorithms through mining and execute smart code. Miners are paid transaction fees (if any) and are rewarded with tokens such as bitcoins, if their work create new value, for instance: A verified new block of hashes to the existing chain of blocks.
• #Token: A token is a multi-purpose instrument and can be found in multiple functions, such as: A smart contract giving rights and obligations, a mining reward to miners, a crypto currency (coins), a digital share, a payment, a right to an (in)tangible asset, a right to real estate etc. Tokens can be used in new protocols and networks (protocol tokens) to create distributed application (app tokens). Tokens are not the same as coins, since tokens can perform more features, than a coin, including representing a store of value, a medium of exchange and a unit of account, i.e. be used as coins.
• #Coins: Coins are not the same as tokens: Coins represents a store of value, a medium of exchange and a unit of account and can be defined by their limited use: Coins can be used as a payment and be traded between parties. If they perform more than that, it is not coins, but tokens.
• #Consensus: Consensus is a specific set of rules, that all full nodes in the network will enforce when considering the validity of a block and its transactions. If participants in that process are preselected (e.g. governments or central banks), the ledger is permissioned. If the process is open to everyone (e.g. Bitcoin), the ledger is unpermissioned. To achieve network consensus, proof of work must be delivered. Adding new consensus rules can be done with a softfork, while removing any consensus rules requires a hardfork.
• #Fork: A fork is a change to the protocol that creates two separate versions of the blockchain with a shared history.
• #Softfork: A softfork is a change to the protocol wherein only previously valid blocks and/or transactions are made invalid. A softfork is backwards compatible as long as a majority of miners enforce it.
• #Hardfork: A hardfork is a change to the protocol that makes previously invalid blocks and/or transactions valid, and therefore requires all users to upgrade. A hardfork is not backwards compatible.
• #Wallet: A wallet contains of one or several crypto currency addresses, which are account numbers to which a number of crypto currencies can be transferred to the wallet.
• #Key: A key is similar to a password, that can open a wallet. Some wallets have multiple keys for security, used for “countersigning”, for instance: A key held by the owner, a second key held by a trusted party and a third key held in a secure backup location.

Based on the technical concepts above, Satoshi Nakamoto’s new protocol had a dual impact on the existing financial system, since it created a new way:

• to store, share and exchange value, and
• to maintain and develop new open and decentralised networks in the network.

The Blockchain (R)evolution

And the idea was well received, even offline.

Since the launch of the protocol, thousands of patents have been filed by different financial players and developers.

The rapid development of Blockchain solutions has already had a significant impact on how independent parties carry out financial transactions. The solutions allow parties to send, receive and record any value or information in a tamper- and revision- proof way.

Cut the Middle Man

The verification process of the financial transactions is not depending on whether or not a centralised and powerful institution approves it.

It depends on an open and democratic process led by the parties using the system, agreeing in consensus by participation in a distributed ledger, that is maintained and updated as chains of blocks in that specific financial network. Anonymity and privacy of the parties is secured by an open cryptographic algorithm acting as a trust protocol for the parties, setting it apart from closed conventional databases at central locations, that could be manipulated or hacked by third parties.

Nakamotos invention was a paradigm shift in the financial world: It suggested a decentralised free-market automation towards a centralised, fragile and regulated financial eco-system using FIAT currencies and securities, that per se was influenced and manipulated by shifting political control led by states, central banks and powerful financial institutions.

What's next?

In five years from now, no one can tell what will have the biggest impact on the global economy. What we know today, might be changed tomorrow, at least when we talk tech developments. Maybe the biggest future impact will be developed by robots using #bigdata combined with #ai, #machinelearning and #deeplearning or maybe it will be developed by ordinary humans using just plain and simple #research?

However, one thing is for sure: Not even the most ultra-conservative and regulated market, the financial sector, is safe from new tech developments and legal challenges.

For about a hundred years ago, Joseph Schumpeter called the phenomena on changing business cycles and the rise and fall of economic players for creative destruction. Schumpeters point was, that entrepreneurial innovation and new developments are aimed to destruct the weakest link in the market. “Creative destruction” is necessary to build up new economic players to make the free market stronger and less fragile.

Today #disruption is a global buzzword, that is used in all kinds of different contexts, but the point is still the same: Technology evolves, no technology remains fixed, and new players will pop-up with smart ways to do things better than before. A disruptive approach will aim to tear down existing structures, so that a new foundation can be built.

Even in ultra-conservative and regulated markets with big financial muscles, disruption is a fact of life.