Explanation of Bitcoin’s Whitepaper (Set-2)

This article is in continuation to my previous article. Make sure you have read that as well. You can find that here.

Incentive
There is only one way of generating new bitcoins in the network and that is through mining or proof-of-work. The reward for mining a block initially started with 50 BTC and the reward is halved every 4 years. The concept of reward was introduced to maintain honesty across the network and also compensate the computational power and electricity spent by the miner to mine a new block. The first transaction of every block is the reward which goes to the miner’s account and is called as the coinbase transaction. If the output value of a transaction is less than its input value, the difference is a taken as transaction fee and is added as reward of the miner. The total supply of bitcoins is 21 million. Once that limit is reached, the only way of generating miner’s fee will be transaction fee and hence making bitcoin inflation free.

Reclaiming Disk Space
Here the concept was, since there are two parts of a block, block header and transactions. Transactions are responsible for most of the block size, and the header part occupies only 80 bytes. This part of the whitepaper has not been implemented. It says, since the transactions are stored in the form of merkle tree and root of merkle tree is hashed and stored in the header, the transactions hash can be discarded as it will not be required.
It also says, according to Moore’s law, the storage capacity of computers will increase by 1.2 times every year and so storage won’t be a problem.

Simplified Payment Verification
There are two types of nodes present in bitcoin network -full nodes, light nodes. Full nodes are those who has downloaded all the blocks(complete) right from the genesis block. Complete blocks here means blocks which has header as well as all the transactions in each block. Light nodes are those which only owns header of all the blocks and not the transactions. Light nodes can’t verify the validity of a transaction. But in case, if it wants to check any transaction, it can request merkle root of the block in which the transaction was placed and place the root in it’s copy of the
chain. Blocks added after that block gives the proof that network nodes have accepted that transaction and it is valid. As the number of honest full nodes in the network decreases, the security of the network also decreases, so most of the companies prefer to run full nodes.

Combining and Splitting values
It is possible to have more than one input and more than one output in a transaction. The transactions in bitcoin can be made only from the available denominations. Like a physical currency, there are not denominations of every number available, either we have to combine smaller denominations to make larger one or we have to send larger denomination and get the refund. This is referred to as UTXO (Unspent Transaction Output) in bitcoin. The extra amount which has to be refunded is needed to be specified in the output of a transaction otherwise it is taken as transaction fee by the miner. In this way, if we combine smaller denominations, a transaction can have more than one input and if we want a refund of extra amount or want to transfer funds to more than one address at a time, a transaction can have more than one output as well.

Privacy
We trust a central financial institution because it keeps our transactions private, and also limits access to information of any third party. But in blockchain, since all the transactions are publicly available, how is privacy achieved? Public keys as name suggests, are public to everyone but are anonymous. Anonymous in the sense no one knows to whom a particular key belongs. In this way, peers can track and validate all the transactions but they won’t get to know the person who is making those transactions.

Conclusion
This is how we can generate trust between unknown parties and without actually relying on trust. To solve the problem of double-spending, we used concept of proof-of-work and time-stamping and a public ledger of all the transactions at the same time maintaining the privacy of the user without showing the owner of the public keys. As long as the system is controlled by honest nodes, the integrity of blockchain will be maintained. Nodes can join and leave the network at their will and every time they return, they can download all the blocks they missed either as a full node or as light node. ”They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them”.