What Satoshi Did

(Editor’s note.  This is part 0 in a series of posts within a grander plan  Part 1. Part 2. Part 3.)

Satoshi Nakamoto drew from the history of cryptocurrencies since David Chaum’s seminal blinding formula in the 1980s.  He postulated that the flaw with existing approaches to cryptocurrencies was that a single powerful attacker could undermine and destroy the system.  In order to to defeat the powerful attacker, Satoshi decentralised the control of the cryptocurrency over an open set of participants, designed a consensus algorithm to align the interests of the majority to find agreement, and thus overcome byzantine actions by minority parties.

This invention works in two parts.  Constructing a shared ledger amongst all participants was the first step.  By sharing the entire ledger of transactions, all participants could convince themselves that their own transactions were validly entered, that all value derived from an authentic source, and that the entire ledger balanced.

The second part was to agree on the ledger.  Using induction, and agreeing on all prior ledger states, Satoshi reduced the problem to agreeing what each new appending block is.  The first batch, or genesis block, was created by Satoshi.  The next block, and each successive block, included a consensus signature over this block and the previous block, creating a chain of blocks, or the blockchain.

In order to secure consensus over each new block, Satoshi employed a novel technique based on proof of work to create a form of signature.  The Nakamoto Signature is a lottery in which everyone calculates a difficult puzzle, being a SHA2 message digest with many leading zeros over their own view of a valid block.  The first person to reach a threshold value in the puzzle wins the prize:  the honour of selecting that block, and the right to create or mine an agreed amount of bitcoins in the first transaction.

By creating a financial prize to find the winning hash, Satoshi incentivised the participants to fight for the winning valid block, and thus ensured many participants working through the validity of the new transactions.  Because proof of work is a cryptographically fair operation, the fairness decentralised the fight for the winning hash, and the resulting incentives were aligned to ensure the integrity, security and value of the system.  In effect, energy was traded for money, and prize-Bitcoin awarded to miners could be sold off to others for use as money.  Thus was created a virtuous feedback loop to incentivise all to verify the correctness of the block and agree to it.

By ensuring that no person could obtain an advantage over others, and by ensuring that anyone could join without exclusion, Satoshi created the Nash equilibrium to permit normally byzantine parties to enter and share safely in the definition of a shared network of contested assets.

(Editor’s note: The challenge is to find the tightest concise description in CS terms.  Comments welcome!) (Part 1. Part 2. Part 3.)

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  • Ofer

    I don’t think bitcoin can be described accurately using only in CS terms, since most of the novelty of bitcoin comes from social and economic world, not to mention the games theory.
    For example one very important thing that is missing – “block halving” which caused the bitcoin meme to spread more and more because of the greed, which gives incentive to jump on the wagon before everyone else.

    Some minor comments:
    * in “The first part” The block itself is valid (has the correct structure – size etc.)
    * “In effect energy was traded for money” is not accurate – it is computing power (!=) energy.
    (there is lots of new developments in computing power to solve sha256 which has nothing to do with energy).

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  • http://jmcmichael.com/ jmcmichael

    I have not read a more concise and enlightening definition of Bitcoin, congratulations!

    I don’t know if this could be worked into your definition, but I think that Bitcoin’s perfect historical record and open algorithm contribute to what is known in game theory as ‘forward induction’. I don’t understand it yet very well, but it struck me that the Nash equilibrium looks a lot like the forward induction equilibrium, as described in ‘Forward Induction Equilibrium’, by Priscilla T. Y. Man. (PDF)

    “Forward induction is the notion that players in a game assume, even when confronted
    with an unexpected event, that their opponents chose rationally in the past and will
    choose rationally in the future. This paper modifies Govindan and Wilson’s (2009, Econometrica
    77(1), 1-28) definition of forward induction and constructs an admissible, invariant
    forward induction equilibrium concept for general games using normal form perfect equilibrium.
    Forward induction equilibrium according to this new definition exists for all finite,
    generic extensive form games with perfect recall. It does not satisfy backward induction.
    Yet for generic extensive form games the set of forward induction outcomes contains an
    invariant sequential equilibrium outcome. Forward induction is not equivalent to iterative
    elimination of strategies dominated at the equilibrium value. In signaling games, a forward
    induction equilibrium survives most existing equilibrium refinements.”

  • John Doe

    “…that all value derived from an authentic source, and that the entire ledger balanced.” How is this achieved with a shared ledger?

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