Connect I Coin
A purely peer-to-peer version of electronic “quid pro quo” would allow online transactions to be sent directly from one party to another without going through an institution. Digital signatures provide part of the solution, but the main benefits are trustless verification of transactions by peers of the network. The network timestamps transactions by hashing them into a chronic chain, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of mining power. As long as a majority of power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest chronic chain as proof of what happened while they were not part of the network.
Cryptocurrency has come to rely almost exclusively on institutions serving as trusted third parties to process electronic exchange, payment, and mining or staking. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. What is needed is a system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the third party problem using a decentralized peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more hashing power than any cooperating group of attacker nodes, without the need for a trusted third-party or exchange.
The only way to confirm transactions is to be aware of all transactions. In the mint based model, the mint was aware of all transactions and decided which arrived first. The Problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank. To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received. The payee needs proof that at the time of each transaction, the majority of nodes agreed it was the first received.
3. Timestamp Server
The solution we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or online. The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system, rather than newspaper or online. The proof-of-work involves scanning for a value that when hashed, begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash. For our timestamp network, we implement the proof-of-work by incrementing a nonce in the block until a value is found that gives the block’s hash the required zero bits. Once the hashing effort has been expended to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it. The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-HASH-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a majority of HASH power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes. We will show later that the probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added. To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.
5. Network (each node is a core wallet)
The steps to run the network are as follows: 1) New transactions are broadcast to all nodes/wallets. 2) Each node collects new transactions into a block. 3) Each node works on finding a difficult hash for its block. 4) When a node finds a hash, it broadcasts the block to all nodes. 5) Nodes accept the block only if all transactions in it are valid and not already spent. 6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash. Nodes always consider the longest chain to be the correct one and will keep working on extending it. If two nodes broadcast different versions of the next block simultaneously, some nodes may receive one or the other first. In that case, they work on the first one they received, but save the other branch in case it becomes longer. The tie will be broken when the next proof-of-work is found and one branch becomes longer; the nodes that were working on the other branch will then switch to the longer one. New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach enough nodes to confirm the transaction, they will get into a block before long. Block broadcasts are also tolerant of dropped messages. If a node does not receive a block, it will request it when it receives the next block and realizes it missed one.
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is hashing time and electricity that is expended. The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely INFLATION FREE. The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more hash power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth. To further protect our network, incentives mature after 2,000 blocks have been produced, and the chain is reinforced with checkpoints.
7. Reclaiming Disk Space
Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the block’s hash, transactions are hashed in a Merkle Tree, with only the root included in the block’s hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do not need to be stored. A block header with no transactions would be about 80 bytes.
8. Simplified Payment Verification
It is possible to verify payments without running a full network node. A user only needs to keep a copy of the block headers of the longest proof-of-work chain, which they can get by querying network nodes until convinced they have the longest chain, and obtain the Merkle branch linking the transaction to the block it’s timestamped in. They can’t confirm the transaction for themselves, but by linking it to a place in the chain, they can see that a network node has accepted it, and blocks added after it further confirm the network has accepted it. As such, the verification is reliable as long as honest nodes control the network, but is more vulnerable if the network is overpowered by an attacker. While network nodes can verify transactions for themselves, the simplified method can be fooled by an attacker’s fabricated transactions for as long as the attacker can continue to overpower the network. One strategy to protect against this would be to accept alerts from network nodes when they detect an invalid block, prompting the user’s software to download the full block and alerted transactions to confirm the inconsistency. Businesses that receive frequent payments will probably still want to run their own nodes for more independent security and quicker verification.
9. Combining and Splitting Value
Although it would be possible to handle coins individually, it would be unwieldy to make a separate transaction for every cent in a transfer. To allow value to be split and combined, normally there will be either a single input from a larger previous transaction or multiple inputs combining smaller amounts. At most two outputs: one for the payment, and one returning the change, if any, back to the sender. It should be noted that fan-out, where a transaction depends on several transactions is not a problem here. There is never the need to extract a complete standalone copy of a transaction’s history.
The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the public keys to anyone. This is similar to the level of information released by stock exchanges, where the time and size of individual trades, the “tape”, is made public, but without telling who the parties were. As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.
We consider the scenario of an attacker trying to generate an alternate chain faster than the honest chain. Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent. The race between the honest chain and an attacker chain can be characterized as a Binomial Random Walk. Successful event is the honest chain being extended by one block, increasing its lead by +1, and failure event is the attacker’s chain being extended by one block, reducing the gap by -1. The probability of an attacker catching up from a given deficit is analogous to a Gambler’s Ruin problem, the probability drops exponentially as the number of blocks the attacker has to catch up with increases. With the odds against the attacker, if they don’t make a lucky lunge forward early on, their chances become vanishingly small as they falls further behind. We now consider how long the recipient of a new transaction needs to wait before being sufficiently certain the sender can’t change the transaction. We assume the sender is an attacker who wants to make the recipient believe they paid for a while, then switch it to pay back to themselves after some time has passed. The receiver will be alerted when that happens, but the sender hopes it will be too late. The receiver generates a new key pair and gives the public key to the sender shortly before signing. This prevents the sender from preparing a chain of blocks ahead of time by working on it continuously until he is lucky enough to get far enough ahead, then executing the transaction at that moment.
We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent third-party control. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of hash power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their hash power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.