Dissecting Bitcoin: Whitepaper[2]

Now, we come to the ultimate article explaining the ins and outs of bitcoin. This is the final article in the trilogy explaining bitcoin and the technology under the hood.

To read the last two articles dealing with bitcoin, please refer:
1- Dissecting Bitcoin: Whitepaper[0]

Dissecting Bitcoin: Whitepaper [0] 2- Dissecting Bitcoin: Whitepaper[1]

Dissecting Bitcoin: Whitepaper[1]

Now, we take our last voyage in the whitepaper of bitcoin and intend to cement our understanding of this cryptocurrency.

For reference to my beloved reader, I attach the whitepaper associated with the bitcoin technology below:
https://bitcoin.org/bitcoin.pdf

Now, we look at the disk space associated with bitcoin technology and how we can reclaim it for our benefit:
The concept of Merkle trees is used to store the information related to the bitcoin blockchain. Merkle trees are named after their originator Ralph Merkle who also invented cryptographic hashing. A rudimentary idea of Merkle trees will be presented below.

Merkle Trees

Refer to the diagram below to better understand the concept of Merkle trees:

A hash function relating to the transaction is shown in every single box on every single hierarchy of the diagram. The hash doesn’t represent the transaction itself. The nodes of Merkle trees are typically classified into three categories:

1- Leaves[the bottom nodes]

2- Root[the top nodes]

3- Branches.[ the middle nodes]

Merkle trees are data structures used to encode blockchain data. They are also referred to as binary hash trees because of their functionality. It is useful as it allows the user to identify the specific transaction without downloading the entire blockchain.

Leaves are connected to a specific transaction. The root is combined with other information such as the timestamp and the previous block hash contributing to the development of the blockchain by producing the block’s unique hash.

Payment Verification System:

Now we will look into the payment verification system. Verification of payments is possible without running a full network node. The only requirement is to keep the block headers of the longest proof-of-work chain which can be achieved by querying the network nodes until the legitimacy of the longest proof-of-work chain is established. This chain is now considered the accurate chain and the remaining transaction follow suit.

We now deal with the 51% attack problem again. Verification is possible as long as the honest nodes control the network but is more vulnerable if the attacker takes control of the network. This would result in a complete disaster for the network as the attacker would attempt to overpower the honest nodes.

Now, let’s look into the combining and splitting of the values of the transactions. The splitting and combination of values can only be permitted by many transaction inputs(tx_in) and numerous transaction outputs(tx_out).

At most two tx-out are generated as the output to the receiver and change back to the sender in specific cases. Because of blockchain technology, there is never a requirement to access the standalone copy of the singular transaction history.

Privacy

Let us now dive into the privacy characteristics of the bitcoin network. The centralized financial services employ traditional security methods where access to information is limited to the parties involved and the trusted third party. If you transfer a certain amount from bank A to bank B from sender A to sender B, the information is secure(maybe!) with you, the recipient of the amount, and the two banks involved. In case of the blockchain technology, all the transactions are publicly broadcasted. Although this might seem like a violation of privacy, we can still achieve privacy by hiding the identities of the parties involved in the transaction. The public keys are kept anonymous as the owner of the public key is not revealed. Although, it is possible to identify the public key's owner by linking multiple transactions back to the owner. If the public key and the owner are revealed, then there is a strong possibility to know about the remaining transactions and the recipient of the remaining transactions.

The calculations in the whitepaper deal with the Gambler’s ruin problem where the probability of the attacker racing with the honest chain is depicted and the chances of the dishonest chain ruining the network are calculated. This will be discussed in the upcoming series of “The math of bitcoin”. As the above trilogy aims at explaining the technology in simpler words, the discussion of the mathematical concepts is out of the scope of the current article.

Although, the reader might refer to the Gambler’s ruin problem and the Poisson identity concepts which will be discussed in the upcoming articles. The proposed system for bitcoin is trustless and secure. Nodes can leave and rejoin the network as per their will given that they follow the consensus mechanism of the network as they do not need to take the permission of the network authorities(none exists!). This is true democracy in the financial world.

I hope the reader has enjoyed this trilogy dissecting the whitepaper of bitcoin. It is amazing to see people read and applaud our stories. I would appreciate any feedback the reader has in order to better serve the needs of the community.