Bitcoin P2P e-cash paper

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Bitcoin P2P e-cash paper

I've been working on a new electronic cash system that's fully
peer-to-peer, with no trusted third party.

The paper is available at:
http://www.bitcoin.org/bitcoin.pdf

The main properties:
Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the
network to prevent double-spending.

Bitcoin: A Peer-to-Peer Electronic Cash System

Abstract. A purely peer-to-peer version of electronic cash would
allow online payments to be sent directly from one party to another
without the burdens of going through a financial institution.
Digital signatures provide part of the solution, but the main
benefits are lost if a trusted party is still required to prevent
double-spending. We propose a solution to the double-spending
problem using a peer-to-peer network. The network timestamps
transactions by hashing them into an ongoing chain of hash-based
proof-of-work, 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 CPU power. As long as honest nodes control
the most CPU power on the network, they can generate the longest
chain and outpace any attackers. The network itself requires
minimal structure. Messages are broadcasted on a best effort basis,
and nodes can leave and rejoin the network at will, accepting the
longest proof-of-work chain as proof of what happened while they
were gone.

Full paper at:
http://www.bitcoin.org/bitcoin.pdf

Satoshi Nakamoto

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Satoshi Nakamoto wrote:
> I've been working on a new electronic cash system that's fully
> peer-to-peer, with no trusted third party.
>
> The paper is available at:
> http://www.bitcoin.org/bitcoin.pdf

We very, very much need such a system, but the way I understand your
proposal, it does not seem to scale to the required size.

For transferable proof of work tokens to have value, they must have
monetary value. To have monetary value, they must be transferred within
a very large network - for example a file trading network akin to
bittorrent.

To detect and reject a double spending event in a timely manner, one
must have most past transactions of the coins in the transaction, which,
naively implemented, requires each peer to have most past
transactions, or most past transactions that occurred recently. If
hundreds of millions of people are doing transactions, that is a lot of
bandwidth - each must know all, or a substantial part thereof.

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>Satoshi Nakamoto wrote:
>> I've been working on a new electronic cash system that's fully
>> peer-to-peer, with no trusted third party.
>>
>> The paper is available at:
>> http://www.bitcoin.org/bitcoin.pdf
>
>We very, very much need such a system, but the way I understand your
>proposal, it does not seem to scale to the required size.
>
>For transferable proof of work tokens to have value, they must have
>monetary value. To have monetary value, they must be transferred within
>a very large network - for example a file trading network akin to
>bittorrent.
>
>To detect and reject a double spending event in a timely manner, one
>must have most past transactions of the coins in the transaction, which,
> naively implemented, requires each peer to have most past
>transactions, or most past transactions that occurred recently. If
>hundreds of millions of people are doing transactions, that is a lot of
>bandwidth - each must know all, or a substantial part thereof.
>

Long before the network gets anywhere near as large as that, it would be safe for users to use Simplified Payment Verification (section 8) to check for double spending, which only requires having the chain of block headers, or about 12KB per day. Only people trying to create new coins would need to run network nodes. At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware. A server farm would only need to have one node on the network and the rest of the LAN connects with that one node.

The bandwidth might not be as prohibitive as you think. A typical transaction would be about 400 bytes (ECC is nicely compact). Each transaction has to be broadcast twice, so lets say 1KB per transaction. Visa processed 37 billion transactions in FY2008, or an average of 100 million transactions per day. That many transactions would take 100GB of bandwidth, or the size of 12 DVD or 2 HD quality movies, or about $18 worth of bandwidth at current prices.

If the network were to get that big, it would take several years, and by then, sending 2 HD movies over the Internet would probably not seem like a big deal.

Satoshi Nakamoto

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> As long as honest nodes control the most CPU power on the network,
> they can generate the longest chain and outpace any attackers.

But they don't. Bad guys routinely control zombie farms of 100,000
machines or more. People I know who run a blacklist of spam sending
zombies tell me they often see a million new zombies a day.

This is the same reason that hashcash can't work on today's Internet
-- the good guys have vastly less computational firepower than the bad
guys.

I also have my doubts about other issues, but this one is the killer.

R's,
John

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>> As long as honest nodes control the most CPU power on the network,
>> they can generate the longest chain and outpace any attackers.
>
>But they don't. Bad guys routinely control zombie farms of 100,000
>machines or more. People I know who run a blacklist of spam sending
>zombies tell me they often see a million new zombies a day.
>
>This is the same reason that hashcash can't work on today's Internet
>-- the good guys have vastly less computational firepower than the bad
>guys.

Thanks for bringing up that point.

I didn't really make that statement as strong as I could have. The requirement is that the good guys collectively have more CPU power than any single attacker.

There would be many smaller zombie farms that are not big enough to overpower the network, and they could still make money by generating bitcoins. The smaller farms are then the "honest nodes". (I need a better term than "honest") The more smaller farms resort to generating bitcoins, the higher the bar gets to overpower the network, making larger farms also too small to overpower it so that they may as well generate bitcoins too. According to the "long tail" theory, the small, medium and merely large farms put together should add up to a lot more than the biggest zombie farm.

Even if a bad guy does overpower the network, it's not like he's instantly rich. All he can accomplish is to take back money he himself spent, like bouncing a check. To exploit it, he would have to buy something from a merchant, wait till it ships, then overpower the network and try to take his money back. I don't think he could make as much money trying to pull a carding scheme like that as he could by generating bitcoins. With a zombie farm that big, he could generate more bitcoins than everyone else combined.

The Bitcoin network might actually reduce spam by diverting zombie farms to generating bitcoins instead.

Satoshi Nakamoto

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James A. Donald:
> > To detect and reject a double spending event in a
> > timely manner, one must have most past transactions
> > of the coins in the transaction, which, naively
> > implemented, requires each peer to have most past
> > transactions, or most past transactions that
> > occurred recently. If hundreds of millions of people
> > are doing transactions, that is a lot of bandwidth -
> > each must know all, or a substantial part thereof.

Satoshi Nakamoto wrote:
> Long before the network gets anywhere near as large as
> that, it would be Safe for users to use Simplified
> Payment Verification (section 8) to check for double
> spending, which only requires having the chain of
> block headers,

If I understand Simplified Payment Verification
correctly:

New coin issuers need to store all coins and all recent
coin transfers.

There are many new coin issuers, as many as want to be
issuers, but far more coin users.

Ordinary entities merely transfer coins. To see if a
coin transfer is OK, they report it to one or more new
coin issuers and see if the new coin issuer accepts it.
New coin issuers check transfers of old coins so that
their new coins have valid form, and they report the
outcome of this check so that people will report their
transfers to the new coin issuer.

If someone double spends a coin, and one expenditure is
reported to one new coin issuer, and the other
simultaneously reported to another new coin issuer, then
both issuers to swifly agree on a unique sequence order
of payments. This, however, is a non trivial problem of
a massively distributed massive database, a notoriously
tricky problem, for which there are at present no peer
to peer solutions. Obiously it is a solvable problem,
people solve it all the time, but not an easy problem.
People fail to solve it rather more frequently.

But let us suppose that the coin issue network is
dominated by a small number of issuers as seems likely.

If a small number of entities are issuing new coins,
this is more resistant to state attack that with a
single issuer, but the government regularly attacks
financial networks, with the financial collapse ensuing
from the most recent attack still under way as I write
this.

Government sponsored enterprises enter the business, in
due course bad behavior is made mandatory, and the evil
financial network is bigger than the honest financial
network, with the result that even though everyone knows
what is happening, people continue to use the paper
issued by the evil financial network, because of network
effects - the big, main issuers, are the issuers you use
if you want to do business.

Then knowledgeable people complain that the evil
financial network is heading for disaster, that the
government sponsored enterprises are about to cause a
"collapse of the total financial system", as Wallison
and Alan Greenspan complained in 2005, the government
debates shrinking the evil government sponsored
enterprises, as with "S. 190 [109th]: Federal Housing
Enterprise Regulatory Reform Act of 2005" but they find
easy money too seductive, and S. 190 goes down in flames
before a horde of political activists chanting that easy
money is sound, and opposing it is racist, nazi,
ignorant, and generally hateful, the recent S. 190
debate on limiting portfolios (bond issue supporting dud
mortgages) by government sponsored enterprises being a
perfect reprise of the debates on limiting the issue of
new assignats in the 1790s.

The big and easy government attacks on money target a
single central money issuer, as with the first of the
modern political attacks, the French Assignat of 1792,
but in the late nineteenth century political attacks on
financial networks began, as for example the Federal
reserve act of 1913, the goal always being to wind up
the network into a single too big to fail entity, and
they have been getting progressively bigger, more
serious, and more disastrous, as with the most recent
one. Each attack is hugely successful, and after the
cataclysm that the attack causes the attackers are
hailed as saviors of the poor, the oppressed, and the
nation generally, and the blame for the the bad
consequences is dumped elsewhere, usually on Jews,
greedy bankers, speculators, etc, because such attacks
are difficult for ordinary people understand. I have
trouble understanding your proposal - ordinary users
will be easily bamboozled by a government sponsored
security update. Further, when the crisis hits, to
disagree with the line, to doubt that the regulators are
right, and the problem is the evil speculators, becomes
political suicide, as it did in America in 2007,
sometimes physical suicide, as in Weimar Germany.

Still, it is better, and more resistant to attack by
government sponsored enterprises, than anything I have
seen so far.

> Visa processed 37 billion transactions in FY2008, or
> an average of 100 million transactions per day. That
> many transactions would take 100GB of bandwidth, or
> the size of 12 DVD or 2 HD quality movies, or about
> $18 worth of bandwidth at current prices.

> If the network were to get that big, it would take
> several years, and by then, sending 2 HD movies over
> the Internet would probably not seem like a big deal.

If there were a hundred or a thousand money issuers by
the time the government attacks, the kind of government
attacks on financial networks that we have recently seen
might well be more difficult.

But I think we need to concern ourselves with minimizing
the data and bandwidth required by money issuers - for
small coins, the protocol seems wasteful. It would be
nice to have the full protocol for big coins, and some
shortcut for small coins wherein people trust account
based money for small amounts till they get wrapped up
into big coins.

The smaller the data storage and bandwidth required for
money issuers, the more resistant the system is the kind
of government attacks on financial networks that we have
recently seen.

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On Tue, 2008-11-04 at 06:20 +1000, James A. Donald wrote:

> If I understand Simplified Payment Verification
> correctly:
>
> New coin issuers need to store all coins and all recent
> coin transfers.
>
> There are many new coin issuers, as many as want to be
> issuers, but far more coin users.
>
> Ordinary entities merely transfer coins. To see if a
> coin transfer is OK, they report it to one or more new
> coin issuers and see if the new coin issuer accepts it.
> New coin issuers check transfers of old coins so that
> their new coins have valid form, and they report the
> outcome of this check so that people will report their
> transfers to the new coin issuer.

I think the real issue with this system is the market
for bitcoins.

Computing proofs-of-work have no intrinsic value. We
can have a limited supply curve (although the "currency"
is inflationary at about 35% as that's how much faster
computers get annually) but there is no demand curve
that intersects it at a positive price point.

I know the same (lack of intrinsic value) can be said of
fiat currencies, but an artificial demand for fiat
currencies is created by (among other things) taxation
and legal-tender laws. Also, even a fiat currency can
be an inflation hedge against another fiat currency's
higher rate of inflation. But in the case of bitcoins
the inflation rate of 35% is almost guaranteed by the
technology, there are no supporting mechanisms for
taxation, and no legal-tender laws. People will not
hold assets in this highly-inflationary currency if
they can help it.

Bear

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>[Lengthy exposition of vulnerability of a systm to use-of-force
>monopolies ellided.]
>
>You will not find a solution to political problems in cryptography.

Yes, but we can win a major battle in the arms race and gain a new territory of freedom for several years.

Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.

Satoshi

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Bitcoin seems to be a very promising idea. I like the idea of basing
security on the assumption that the CPU power of honest participants
outweighs that of the attacker. It is a very modern notion that exploits
the power of the long tail. When Wikipedia started I never thought it
would work, but it has proven to be a great success for some of the
same reasons.

I also do think that there is potential value in a form of unforgeable
token whose production rate is predictable and can't be influenced
by corrupt parties. This would be more analogous to gold than to fiat
currencies. Nick Szabo wrote many years ago about what he called "bit
gold"[1] and this could be an implementation of that concept. There have
also been proposals for building light-weight anonymous payment schemes on
top of heavy-weight non-anonymous systems, so Bitcoin could be leveraged
to allow for anonymity even beyond the mechanisms discussed in the paper.

Unfortunately I am having trouble fully understanding the system. The
paper describes key concepts and some data structures, but does not
clearly specify the various rules and verifications that the participants
in the system would have to follow.

In particular I don't understand exactly what verifications P2P nodes
perform when they receive new blocks from other nodes, and how they
handle transactions that have been broadcast to them. For example, it
is mentioned that if a broadcast transaction does not reach all nodes,
it is OK, as it will get into the block chain before long. How does this
happen - what if the node that creates the "next" block (the first node
to find the hashcash collision) did not hear about the transaction,
and then a few more blocks get added also by nodes that did not hear
about that transaction? Do all the nodes that did hear it keep that
transaction around, hoping to incorporate it into a block once they get
lucky enough to be the one which finds the next collision?

Or for example, what if a node is keeping two or more chains around as
it waits to see which grows fastest, and a block comes in for chain A
which would include a double-spend of a coin that is in chain B? Is that
checked for or not? (This might happen if someone double-spent and two
different sets of nodes heard about the two different transactions with
the same coin.)

This kind of data management, and the rules for handling all the packets
that are flowing around is largely missing from the paper.

I also don't understand exactly how double-spending, or cancelling
transactions, is accomplished by a superior attacker who is able to muster
more computing power than all the honest participants. I see that he can
create new blocks and add them to create the longest chain, but how can
he erase or add old transactions in the chain? As the attacker sends out
his new blocks, aren't there consistency checks which honest nodes can
perform, to make sure that nothing got erased? More explanation of this
attack would be helpful, in order to judge the gains to an attacker from
this, versus simply using his computing power to mint new coins honestly.

As far as the spending transactions, what checks does the recipient of a
coin have to perform? Does she need to go back through the coin's entire
history of transfers, and make sure that every transaction on the list is
indeed linked into the "timestamp" block chain? Or can she just do the
latest one? Do the timestamp nodes check transactions, making sure that
the previous transaction on a coin is in the chain, thereby enforcing
the rule that all transactions in the chain represent valid coins?

Sorry about all the questions, but as I said this does seem to be a
very promising and original idea, and I am looking forward to seeing
how the concept is further developed. It would be helpful to see a more
process oriented description of the idea, with concrete details of the
data structures for the various objects (coins, blocks, transactions),
the data which is included in messages, and algorithmic descriptions
of the procedures for handling the various events which would occur in
this system. You mentioned that you are working on an implementation,
but I think a more formal, text description of the system would be a
helpful next step.

Hal Finney

[1] http://unenumerated.blogspot.com/2005/12/bit-gold.html

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Ray Dillinger:
> the "currency" is inflationary at about 35%
> as that's how much faster computers get annually
> ... the inflation rate of 35% is almost guaranteed
> by the technology

Increasing hardware speed is handled: "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."

As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.

The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.

Coins have to get initially distributed somehow, and a constant rate seems like the best formula.

Satoshi Nakamoto

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Hal Finney wrote:
> it is mentioned that if a broadcast transaction does not reach all nodes,
> it is OK, as it will get into the block chain before long. How does this
> happen - what if the node that creates the "next" block (the first node
> to find the hashcash collision) did not hear about the transaction,
> and then a few more blocks get added also by nodes that did not hear
> about that transaction? Do all the nodes that did hear it keep that
> transaction around, hoping to incorporate it into a block once they get
> lucky enough to be the one which finds the next collision?

Right, nodes keep transactions in their working set until they get into a block. If a transaction reaches 90% of nodes, then each time a new block is found, it has a 90% chance of being in it.

> Or for example, what if a node is keeping two or more chains around as
> it waits to see which grows fastest, and a block comes in for chain A
> which would include a double-spend of a coin that is in chain B? Is that
> checked for or not? (This might happen if someone double-spent and two
> different sets of nodes heard about the two different transactions with
> the same coin.)

That does not need to be checked for. The transaction in whichever branch ends up getting ahead becomes the valid one, the other is invalid. If someone tries to double spend like that, one and only one spend will always become valid, the others invalid.

Receivers of transactions will normally need to hold transactions for perhaps an hour or more to allow time for this kind of possibility to be resolved. They can still re-spend the coins immediately, but they should wait before taking an action such as shipping goods.

> I also don't understand exactly how double-spending, or cancelling
> transactions, is accomplished by a superior attacker who is able to muster
> more computing power than all the honest participants. I see that he can
> create new blocks and add them to create the longest chain, but how can
> he erase or add old transactions in the chain? As the attacker sends out
> his new blocks, aren't there consistency checks which honest nodes can
> perform, to make sure that nothing got erased? More explanation of this
> attack would be helpful, in order to judge the gains to an attacker from
> this, versus simply using his computing power to mint new coins honestly.

The attacker isn't adding blocks to the end. He has to go back and redo the block his transaction is in and all the blocks after it, as well as any new blocks the network keeps adding to the end while he's doing that. He's rewriting history. Once his branch is longer, it becomes the new valid one.

This touches on a key point. Even though everyone present may see the shenanigans going on, there's no way to take advantage of that fact.

It is strictly necessary that the longest chain is always considered the valid one. Nodes that were present may remember that one branch was there first and got replaced by another, but there would be no way for them to convince those who were not present of this. We can't have subfactions of nodes that cling to one branch that they think was first, others that saw another branch first, and others that joined later and never saw what happened. The CPU power proof-of-work vote must have the final say. The only way for everyone to stay on the same page is to believe that the longest chain is always the valid one, no matter what.

> As far as the spending transactions, what checks does the recipient of a
> coin have to perform? Does she need to go back through the coin's entire
> history of transfers, and make sure that every transaction on the list is
> indeed linked into the "timestamp" block chain? Or can she just do the
> latest one?

The recipient just needs to verify it back to a depth that is sufficiently far back in the block chain, which will often only require a depth of 2 transactions. All transactions before that can be discarded.

> Do the timestamp nodes check transactions, making sure that
> the previous transaction on a coin is in the chain, thereby enforcing
> the rule that all transactions in the chain represent valid coins?

Right, exactly. When a node receives a block, it checks the signatures of every transaction in it against previous transactions in blocks. Blocks can only contain transactions that depend on valid transactions in previous blocks or the same block. Transaction C could depend on transaction B in the same block and B depends on transaction A in an earlier block.

> Sorry about all the questions, but as I said this does seem to be a
> very promising and original idea, and I am looking forward to seeing
> how the concept is further developed. It would be helpful to see a more
> process oriented description of the idea, with concrete details of the
> data structures for the various objects (coins, blocks, transactions),
> the data which is included in messages, and algorithmic descriptions
> of the procedures for handling the various events which would occur in
> this system. You mentioned that you are working on an implementation,
> but I think a more formal, text description of the system would be a
> helpful next step.

I appreciate your questions. I actually did this kind of backwards. I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper. I think I will be able to release the code sooner than I could write a detailed spec. You're already right about most of your assumptions where you filled in the blanks.

Satoshi Nakamoto

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James A. Donald wrote:
> The core concept is that lots of entities keep complete and consistent
> information as to who owns which bitcoins.
>
> But maintaining consistency is tricky. It is not clear to me what
> happens when someone reports one transaction to one maintainer, and
> someone else transports another transaction to another maintainer. The
> transaction cannot be known to be valid until it has been incorporated
> into a globally shared view of all past transactions, and no one can
> know that a globally shared view of all past transactions is globally
> shared until after some time has passed, and after many new
> transactions have arrived.
>
> Did you explain how to do this, and it just passed over my head, or
> were you confident it could be done, and a bit vague as to the details?

The proof-of-work chain is the solution to the synchronisation problem, and to knowing what the globally shared view is without having to trust anyone.

A transaction will quickly propagate throughout the network, so if two versions of the same transaction were reported at close to the same time, the one with the head start would have a big advantage in reaching many more nodes first. Nodes will only accept the first one they see, refusing the second one to arrive, so the earlier transaction would have many more nodes working on incorporating it into the next proof-of-work. In effect, each node votes for its viewpoint of which transaction it saw first by including it in its proof-of-work effort.

If the transactions did come at exactly the same time and there was an even split, it's a toss up based on which gets into a proof-of-work first, and that decides which is valid.

When a node finds a proof-of-work, the new block is propagated throughout the network and everyone adds it to the chain and starts working on the next block after it. Any nodes that had the other transaction will stop trying to include it in a block, since it's now invalid according to the accepted chain.

The proof-of-work chain is itself self-evident proof that it came from the globally shared view. Only the majority of the network together has enough CPU power to generate such a difficult chain of proof-of-work. Any user, upon receiving the proof-of-work chain, can see what the majority of the network has approved. Once a transaction is hashed into a link that's a few links back in the chain, it is firmly etched into the global history.

Satoshi Nakamoto

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Satoshi Nakamoto wrote:
> The bandwidth might not be as prohibitive as you
> think. A typical transaction would be about 400 bytes
> (ECC is nicely compact). Each transaction has to be
> broadcast twice, so lets say 1KB per transaction.
> Visa processed 37 billion transactions in FY2008, or
> an average of 100 million transactions per day. That
> many transactions would take 100GB of bandwidth, or
> the size of 12 DVD or 2 HD quality movies, or about
> $18 worth of bandwidth at current prices.

The trouble is, you are comparing with the Bankcard
network.

But a new currency cannot compete directly with an old,
because network effects favor the old.

You have to go where Bankcard does not go.

At present, file sharing works by barter for bits. This,
however requires the double coincidence of wants. People
only upload files they are downloading, and once the
download is complete, stop seeding. So only active
files, files that quite a lot of people want at the same
time, are available.

File sharing requires extremely cheap transactions,
several transactions per second per client, day in and
day out, with monthly transaction costs being very small
per client, so to support file sharing on bitcoins, we
will need a layer of account money on top of the
bitcoins, supporting transactions of a hundred
thousandth the size of the smallest coin, and to support
anonymity, chaumian money on top of the account money.

Let us call a bitcoin bank a bink. The bitcoins stand
in the same relation to account money as gold stood in
the days of the gold standard. The binks, not trusting
each other to be liquid when liquidity is most needed,
settle out any net discrepancies with each other by
moving bit coins around once every hundred thousand
seconds or so, so bitcoins do not change owners that
often, Most transactions cancel out at the account
level. The binks demand bitcoins of each other only
because they don't want to hold account money for too
long. So a relatively small amount of bitcoins
infrequently transacted can support a somewhat larger
amount of account money frequently transacted.

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--
Satoshi Nakamoto wrote:
> The proof-of-work chain is the solution to the
> synchronisation problem, and to knowing what the
> globally shared view is without having to trust
> anyone.
>
> A transaction will quickly propagate throughout the
> network, so if two versions of the same transaction
> were reported at close to the same time, the one with
> the head start would have a big advantage in reaching
> many more nodes first. Nodes will only accept the
> first one they see, refusing the second one to arrive,
> so the earlier transaction would have many more nodes
> working on incorporating it into the next
> proof-of-work. In effect, each node votes for its
> viewpoint of which transaction it saw first by
> including it in its proof-of-work effort.

OK, suppose one node incorporates a bunch of
transactions in its proof of work, all of them honest
legitimate single spends and another node incorporates a
slightly different bunch of transactions in its proof of
work, all of them equally honest legitimate single
spends, and both proofs are generated at about the same
time.

What happens then?

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Satoshi Nakamoto wrote:
> Increasing hardware speed is handled: "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."

This does not work - your proposal involves
complications I do not think you have thought through.

Furthermore, it cannot be made to work, as in the
proposed system the work of tracking who owns what coins
is paid for by seigniorage, which requires inflation.

This is not an intolerable flaw - predictable inflation
is less objectionable than inflation that gets jiggered
around from time to time to transfer wealth from one
voting block to another.

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James A. Donald wrote:
>OK, suppose one node incorporates a bunch of
>transactions in its proof of work, all of them honest
>legitimate single spends and another node incorporates a
>different bunch of transactions in its proof of
>work, all of them equally honest legitimate single
>spends, and both proofs are generated at about the same
>time.
>
>What happens then?

They both broadcast their blocks. All nodes receive them and keep both, but only work on the one they received first. We'll suppose exactly half received one first, half the other.

In a short time, all the transactions will finish propagating so that everyone has the full set. The nodes working on each side will be trying to add the transactions that are missing from their side. When the next proof-of-work is found, whichever previous block that node was working on, that branch becomes longer and the tie is broken. Whichever side it is, the new block will contain the other half of the transactions, so in either case, the branch will contain all transactions. Even in the unlikely event that a split happened twice in a row, both sides of the second split would contain the full set of transactions anyway.

It's not a problem if transactions have to wait one or a few extra cycles to get into a block.

Satoshi Nakamoto

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--
> James A. Donald wrote:
>> OK, suppose one node incorporates a bunch of
>> transactions in its proof of work, all of them honest
>> legitimate single spends and another node
>> incorporates a different bunch of transactions in its
>> proof of work, all of them equally honest legitimate
>> single spends, and both proofs are generated at about
>> the same time.
>>
>> What happens then?

Satoshi Nakamoto wrote:
> They both broadcast their blocks. All nodes receive
> them and keep both, but only work on the one they
> received first. We'll suppose exactly half received
> one first, half the other.
>
> In a short time, all the transactions will finish
> propagating so that everyone has the full set. The
> nodes working on each side will be trying to add the
> transactions that are missing from their side. When
> the next proof-of-work is found, whichever previous
> block that node was working on, that branch becomes
> longer and the tie is broken. Whichever side it is,
> the new block will contain the other half of the
> transactions, so in either case, the branch will
> contain all transactions. Even in the unlikely event
> that a split happened twice in a row, both sides of
> the second split would contain the full set of
> transactions anyway.
>
> It's not a problem if transactions have to wait one or
> a few extra cycles to get into a block.

So what happened to the coin that lost the race?

On the one hand, we want people who make coins to be
motivated to keep and record all transactions, and
obtain an up to date record of all transactions in a
timely manner. On the other hand, it is a bit harsh if
the guy who came second is likely to lose his coin.

Further, your description of events implies restrictions
on timing and coin generation - that the entire network
generates coins slowly compared to the time required for
news of a new coin to flood the network, otherwise the
chains diverge more and more, and no one ever knows
which chain is the winner.

You need to make these restrictions explicit, for
network flood time may well be quite slow.

Which implies that the new coin rate is slower.

We want spenders to have certainty that their
transaction is valid at the time it takes a spend to
flood the network, not at the time it takes for branch
races to be resolved.

At any given time, for example at 1 040 689 138 seconds
we can look back at the past and say:

At 1 040 688 737 seconds, node 5 was *it*, and
he incorporated all the coins he had discovered
into the chain, and all the new transactions he
knew about on top of the previous link

At 1 040 688 792 seconds, node 2 was *it*, and
he incorporated all the coins he had discovered
into the chain, and all the new transactions he
knew about into the chain on top of node 5's
link.

At 1 040 688 745 seconds, node 7 was *it*, and
he incorporated all the coins he had discovered
into the chain, and all the new transactions he
knew about into the chain on top of node 2's
link.

But no one can know who is *it* right now

So how does one know when to reveal one's coins? One
solution is that one does not. One incorporates a hash
of the coin secret whenever one thinks one might be
*it*, and after that hash is securely in the chain,
after one knows that one was *it* at the time, one can
then safely spend the coin that one has found, revealing
the secret.

This solution takes care of the coin revelation problem,
but does not solve the spend recording problem. If one
node is ignoring all spends that it does not care about,
it suffers no adverse consequences. We need a protocol
in which your prospects of becoming *it* also depend on
being seen by other nodes as having a reasonably up to
date and complete list of spends - which this protocol
is not, and your protocol is not either.

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James A. Donald wrote:
> Furthermore, it cannot be made to work, as in the
> proposed system the work of tracking who owns what coins
> is paid for by seigniorage, which requires inflation.

If you're having trouble with the inflation issue, it's easy to tweak it for transaction fees instead. It's as simple as this: let the output value from any transaction be 1 cent less than the input value. Either the client software automatically writes transactions for 1 cent more than the intended payment value, or it could come out of the payee's side. The incentive value when a node finds a proof-of-work for a block could be the total of the fees in the block.

Satoshi Nakamoto

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James A. Donald wrote:
> So what happened to the coin that lost the race?
>
> ... it is a bit harsh if the guy who came second
> is likely to lose his coin.

When there are multiple double-spent versions of the same transaction, one and only one will become valid.

The receiver of a payment must wait an hour or so before believing that it's valid. The network will resolve any possible double-spend races by then.

The guy who received the double-spend that became invalid never thought he had it in the first place. His software would have shown the transaction go from "unconfirmed" to "invalid". If necessary, the UI can be made to hide transactions until they're sufficiently deep in the block chain.

> Further, your description of events implies restrictions
> on timing and coin generation - that the entire network
> generates coins slowly compared to the time required for
> news of a new coin to flood the network

Sorry if I didn't make that clear. The target time between blocks will probably be 10 minutes.

Every block includes its creation time. If the time is off by more than 36 hours, other nodes won't work on it. If the timespan over the last 6*24*30 blocks is less than 15 days, blocks are being generated too fast and the proof-of-work difficulty doubles. Everyone does the same calculation with the same chain data, so they all get the same result at the same link in the chain.

> We want spenders to have certainty that their
> transaction is valid at the time it takes a spend to
> flood the network, not at the time it takes for branch
> races to be resolved.

Instantant non-repudiability is not a feature, but it's still much faster than existing systems. Paper cheques can bounce up to a week or two later. Credit card transactions can be contested up to 60 to 180 days later. Bitcoin transactions can be sufficiently irreversible in an hour or two.

> If one node is ignoring all spends that it does not
> care about, it suffers no adverse consequences.

With the transaction fee based incentive system I recently posted, nodes would have an incentive to include all the paying transactions they receive.

Satoshi Nakamoto

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Satoshi Nakamoto wrote:
> When there are multiple double-spent versions of the
> same transaction, one and only one will become valid.

That is not the question I am asking.

It is not trust that worries me, it is how it is
possible to have a a globally shared view even if
everyone is well behaved.

The process for arriving at a globally shared view of
who owns what bitgold coins is insufficiently specified.
Once specified, then we can start considering whether
everyone has incentives to behave correctly.

It is not sufficient that everyone knows X. We also
need everyone to know that everyone knows X, and that
everyone knows that everyone knows that everyone knows X
- which, as in the Byzantine Generals problem, is the
classic hard problem of distributed data processing.

This problem becomes harder when X is quite possibly a
very large amount of data - agreement on who was the
owner of every bitgold coin at such and such a time.

And then on top of that we need everyone to have a
motive to behave in such a fashion that agreement
arises. I cannot see that they have motive when I do
not know the behavior to be motivated.

You keep repeating your analysis of the system under
attack. We cannot say how the system will behave under
attack until we know how the system is supposed to
behave when not under attack.

If there are a lot of transactions, it is hard to
efficiently discover the discrepancies between one
node's view and another node's view, and because new
transactions are always arriving, no two nodes will ever
have the same view, even if all nodes are honest, and
all reported transactions are correct and true single
spends.

We should be able to accomplish a system where two nodes
are likely to come to agreement as to who owned what
bitgold coins at some very recent past time, but it is
not simple to do so.

If one node constructs a hash that represents its
knowledge of who owned what bitgold coins at a
particular time, and another node wants to check that
hash, it is not simple to do it in such a way that
agreement is likely, and disagreement between honest
well behaved nodes is efficiently detected and
efficiently resolved.

And if we had a specification of how agreement is
generated, it is not obvious why the second node has
incentive to check that hash.

The system has to work in such a way that nodes can
easily and cheaply change their opinion about recent
transactions, so as to reach consensus, but in order to
provide finality and irreversibility, once consensus has
been reached, and then new stuff has be piled on top of
old consensus, in particular new bitgold has been piled
on top of old consensus, it then becomes extremely
difficult to go back and change what was decided.

Saying that is how it works, does not give us a method
to make it work that way.

> The receiver of a payment must wait an hour or so
> before believing that it's valid. The network will
> resolve any possible double-spend races by then.

You keep discussing attacks. I find it hard to think
about response to attack when it is not clear to me what
normal behavior is in the case of good conduct by each
and every party.

Distributed databases are *hard* even when all the
databases perfectly follow the will of a single owner.
Messages get lost, links drop, syncrhonization delays
become abnormal, and entire machines go up in flames,
and the network as a whole has to take all this in its
stride.

Figuring out how to do this is hard, even in the
complete absence of attacks. Then when we have figured
out how to handle all this, then come attacks.

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James A. Donald writes:
> Satoshi Nakamoto wrote:
> > When there are multiple double-spent versions of the
> > same transaction, one and only one will become valid.
>
> That is not the question I am asking.
>
> It is not trust that worries me, it is how it is
> possible to have a a globally shared view even if
> everyone is well behaved.
>
> The process for arriving at a globally shared view of
> who owns what bitgold coins is insufficiently specified.

I agree that the description is not completely clear on how these matters
are handled. Satoshi has suggested that releasing source code may be the
best way to clarify the design. As I have tried to work through details on
my own, it does appear that the rules become rather complicated and indeed
one needs at least a pseudo-code algorithm to specify the behavior. So
perhaps writing real code is not a bad way to go. I found that there is
a sourceforge project set up for bitgold, although it does not have any
code yet.

In answer to James' specific question, about what happens when different
nodes see different sets of transactions, due to imperfect broadcast, here
is how I understand it. Each node must be prepared to maintain potentially
several "candidate" block chains, each of which may eventually turn out
to become the longest one, the one which wins. Once a given block chain
becomes sufficiently longer than a competitor, the shorter one can be
deleted. This length differential is a parameter which depends on the
node's threat model for how much compute power an attacker can marshall,
in terms of the fraction of the "honst" P2P network's work capacity,
and is estimated in the paper. The idea is that once a chain gets far
enough behind the longest one, there is essentially no chance that it
can ever catch up.

In order to resolve the issue James raised, I think it is necessary
that nodes keep a separate pending-transaction list associated with
each candidate chain. This list would include all transactions the node
has received (via broadcast by the transactees) but which have not yet
been incorporated into that block chain. At any given time, the node is
working to extend the longest block chain, and the block it is working
to find a hash collision for will include all of the pending transactions
associated with that chain.

I think that this way, when a candidate chain is deleted because it
got too much shorter than the longest one, transactions in it are
not lost, but have continued to be present in the pending-transaction
list associated with the longest chain, in those nodes which heard the
original transaction broadcast. (I have also considered whether nodes
should add transactions to their pending-transaction list that they
learn about through blocks from other nodes, even if those blocks do
not end up making their way into the longest block chain; but I'm not
sure if that is necessary or helpful.)

Once these rules are clarified, more formal modeling will be helpful in
understanding the behavior of the network given imperfect reliability. For
example, if on average a fraction f of P2P nodes receive a given
transaction broadcast, then I think one would expect 1/f block-creation
times to elapse before the transaction appears in what is destined to
become the longest chain. One might also ask, given that the P2P network
broadcast is itself imperfectly reliable, how many candidate chains
must a given node keep track of at one time, on average? Or as James
raised earlier, if the network broadcast is reliable but depends on a
potentially slow flooding algorithm, how does that impact performance?

> And then on top of that we need everyone to have a
> motive to behave in such a fashion that agreement
> arises. I cannot see that they have motive when I do
> not know the behavior to be motivated.

I am somewhat less worried about motivation. I'd be satisfied if the
system can meet the following criteria:

1. No single node operator, or small collection of node operators
which controls only a small fraction of overall network resources,
can effectively cheat, if other players are honest.

2. The long tail of node operators is sufficiently large that no small
collection of nodes can control more than a small fraction of overall
resources. (Here, the "tail" refers to a ranking based on amount of
resources controlled by each operator.)

3. The bitcoin system turns out to be socially useful and valuable, so
that node operators feel that they are making a beneficial contribution
to the world by their efforts (similar to the various "@Home" compute
projects where people volunteer their compute resources for good causes).

In this case it seems to me that simple altruism can suffice to keep the
network running properly.

> Distributed databases are *hard* even when all the
> databases perfectly follow the will of a single owner.
> Messages get lost, links drop, syncrhonization delays
> become abnormal, and entire machines go up in flames,
> and the network as a whole has to take all this in its
> stride.

A very good point, and a more complete specification is necessary in order
to understand how the network will respond to imperfections like this. I
am looking forward to seeing more detail emerge.

One thing I might mention is that in many ways bitcoin is two independent
ideas: a way of solving the kinds of problems James lists here, of
creating a globally consistent but decentralized database; and then using
it for a system similar to Wei Dai's b-money (which is referenced in the
paper) but transaction/coin based rather than account based. Solving the
global, massively decentralized database problem is arguably the harder
part, as James emphasizes. The use of proof-of-work as a tool for this
purpose is a novel idea well worth further review IMO.

Hal Finney

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James A. Donald wrote:
> It is not sufficient that everyone knows X. We also
> need everyone to know that everyone knows X, and that
> everyone knows that everyone knows that everyone knows X
> - which, as in the Byzantine Generals problem, is the
> classic hard problem of distributed data processing.

The proof-of-work chain is a solution to the Byzantine Generals' Problem. I'll try to rephrase it in that context.

A number of Byzantine Generals each have a computer and want to attack the King's wi-fi by brute forcing the password, which they've learned is a certain number of characters in length. Once they stimulate the network to generate a packet, they must crack the password within a limited time to break in and erase the logs, otherwise they will be discovered and get in trouble. They only have enough CPU power to crack it fast enough if a majority of them attack at the same time.

They don't particularly care when the attack will be, just that they all agree. It has been decided that anyone who feels like it will announce a time, and whatever time is heard first will be the official attack time. The problem is that the network is not instantaneous, and if two generals announce different attack times at close to the same time, some may hear one first and others hear the other first.

They use a proof-of-work chain to solve the problem. Once each general receives whatever attack time he hears first, he sets his computer to solve an extremely difficult proof-of-work problem that includes the attack time in its hash. The proof-of-work is so difficult, it's expected to take 10 minutes of them all working at once before one of them finds a solution. Once one of the generals finds a proof-of-work, he broadcasts it to the network, and everyone changes their current proof-of-work computation to include that proof-of-work in the hash they're working on. If anyone was working on a different attack time, they switch to this one, because its proof-of-work chain is now longer.

After two hours, one attack time should be hashed by a chain of 12 proofs-of-work. Every general, just by verifying the difficulty of the proof-of-work chain, can estimate how much parallel CPU power per hour was expended on it and see that it must have required the majority of the computers to produce that much proof-of-work in the allotted time. They had to all have seen it because the proof-of-work is proof that they worked on it. If the CPU power exhibited by the proof-of-work chain is sufficient to crack the password, they can safely attack at the agreed time.

The proof-of-work chain is how all the synchronisation, distributed database and global view problems you've asked about are solved.

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Hal Finney wrote:
> I think it is necessary that nodes keep a separate
> pending-transaction list associated with each candidate chain.
> ... One might also ask ... how many candidate chains must
> a given node keep track of at one time, on average?

Fortunately, it's only necessary to keep a pending-transaction pool for the current best branch. When a new block arrives for the best branch, ConnectBlock removes the block's transactions from the pending-tx pool. If a different branch becomes longer, it calls DisconnectBlock on the main branch down to the fork, returning the block transactions to the pending-tx pool, and calls ConnectBlock on the new branch, sopping back up any transactions that were in both branches. It's expected that reorgs like this would be rare and shallow.

With this optimisation, candidate branches are not really any burden. They just sit on the disk and don't require attention unless they ever become the main chain.

> Or as James raised earlier, if the network broadcast
> is reliable but depends on a potentially slow flooding
> algorithm, how does that impact performance?

Broadcasts will probably be almost completely reliable. TCP transmissions are rarely ever dropped these days, and the broadcast protocol has a retry mechanism to get the data from other nodes after a while. If broadcasts turn out to be slower in practice than expected, the target time between blocks may have to be increased to avoid wasting resources. We want blocks to usually propagate in much less time than it takes to generate them, otherwise nodes would spend too much time working on obsolete blocks.

I'm planning to run an automated test with computers randomly sending payments to each other and randomly dropping packets.

> 3. The bitcoin system turns out to be socially useful and valuable, so
> that node operators feel that they are making a beneficial contribution
> to the world by their efforts (similar to the various "@Home" compute
> projects where people volunteer their compute resources for good causes).
>
> In this case it seems to me that simple altruism can suffice to keep the
> network running properly.

It's very attractive to the libertarian viewpoint if we can explain it properly. I'm better with code than with words though.

Satoshi Nakamoto

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Okay.... I'm going to summarize this protocol as I understand it.

I'm filling in some operational details that aren't in the paper
by supplementing what you wrote with what my own "design sense"
tells me are critical missing bits or "obvious" methodologies for
use.

First, people spend computer power creating a pool of coins to use
as money. Each coin is a proof-of-work meeting whatever criteria
were in effect for money at the time it was created. The time of
creation (and therefore the criteria) is checkable later because
people can see the emergence of this particular coin in the
transaction chain and track it through all its "consensus view"
spends. (more later on coin creation tied to adding a link).

When a coin is spent, the buyer and seller digitally sign a (blinded)
transaction record, and broadcast it to a bunch of nodes whose purpose
is keeping track of consensus regarding coin ownership. If someone
double spends, then the transaction record can be unblinded revealing
the identity of the cheater. This is done via a fairly standard cut-
and-choose algorithm where the buyer responds to several challenges
with secret shares, and the seller then asks him to "unblind" and
checks all but one, verifying that they do contain secret shares any
two of which are sufficient to identify the buyer. In this case the
seller accepts the unblinded spend record as "probably" containing
a valid secret share.

The nodes keeping track of consensus regarding coin ownership are in
a loop where they are all trying to "add a link" to the longest chain
they've so far recieved. They have a pool of reported transactions
which they've not yet seen in a "consensus" signed chain. I'm going
to call this pool "A". They attempt to add a link to the chain by
moving everything from pool A into a pool "L" and using a CPU-
intensive digital signature algorithm to sign the chain including
the new block L. This results in a chain extended by a block
containing all the transaction records they had in pool L, plus
the node's digital signature. While they do this, new
transaction records continue to arrive and go into pool A again
for the next cycle of work.

They may also recieve chains as long as the one they're trying to
extend while they work, in which the last few "links" are links
that are *not* in common with the chain on which they're working.
These they ignore. (? Do they ignore them? Under what
circumstances would these become necessary to ever look at again,
bearing in mind that any longer chain based on them will include
them?)

But if they recieve a _longer_ chain while working, they
immediately check all the transactions in the new links to make
sure it contains no double spends and that the "work factors" of
all new links are appropriate. If it contains a double spend,
then they create a "transaction" which is a proof of double
spending, add it to their pool A, broadcast it, and continue work.
If one of the "new" links has an inappropriate work factor (ie,
someone didn't put enough CPU into it for it to be "licit"
according to the rules) a new "transaction" which is a proof
of the protocol violation by the link-creating node is created,
broadcast, and added to pool A, and the chain is rejected. In
the case of no double spends and appropriate work factors for
all links not yet seen, they accept the new chain as consensus.

If the new chain is accepted, then they give up on adding their
current link, dump all the transactions from pool L back into pool
A (along with transactions they've recieved or created since
starting work), eliminate from pool A those transaction records
which are already part of a link in the new chain, and start work
again trying to extend the new chain.

If they complete work on a chain extended with their new link, they
broadcast it and immediately start work on another new link with
all the transactions that have accumulated in pool A since they
began work.

Do I understand it correctly?

Biggest Technical Problem:

Is there a mechanism to make sure that the "chain" does not consist
solely of links added by just the 3 or 4 fastest nodes? 'Cause a
broadcast transaction record could easily miss those 3 or 4 nodes
and if it does, and those nodes continue to dominate the chain, the
transaction might never get added.

To remedy this, you need to either ensure provable propagation of
transactions, or vary the work factor for a node depending on how
many links have been added since that node's most recent link.

Unfortunately, both measures can be defeated by sock puppets.
This is probably the worst problem with your protocol as it
stands right now; you need some central point to control the
identities (keys) of the nodes and prevent people from making
new sock puppets.

Provable propagation would mean that When Bob accepts a new chain
from Alice, he needs to make sure that Alice has (or gets) all
transactions in his "A" and "L" pools. He sends them, and
Alice sends back a signed hash to prove she got them. Once
Alice has recieved this block of transactions, if any subsequent
chains including a link added by Alice do not include those
transactions at or before that link, then Bob should be able to
publish the block he sent Alice, along with her signature, in a
transaction as proof that Alice violated protocol. Sock puppets
defeat this because Alice just signs subsequent chains using a
new key, pretending to be a different node.

If we go with varying the work factor depending on how many new
links there are, then we're right back to domination by the 3
or 4 fastest nodes, except now they're joined by 600 or so
sock puppets which they use to avoid the work factor penalty.

If we solve the sock-puppet issue, or accept that there's a central
point controlling the generation of new keys, then generation of
coins should be tied to the act of successfully adding a block to
the "consensus" chain. This is simple to do; creation of a coin
is a transaction, it gets added along with all the other transactions
in the block. But you can only create one coin per link, and of
course if your version of the chain isn't the one that gets accepted,
then in the "accepted" view you don't have the coin and can't spend
it. This gives the people maintaining the consensus database a
reason to spend CPU cycles, especially since the variance in work
factor by number of links added since their own last link (outlined
above) guarantees that everyone, not just the 3 or 4 fastest nodes,
occasionally gets the opportunity to create a coin.

Also, the work requirement for adding a link to the chain should
vary (again exponentially) with the number of links added to that
chain in the previous week, causing the rate of coin generation
(and therefore inflation) to be strictly controlled.

You need coin aggregation for this to scale. There needs to be
a "provable" transaction where someone retires ten single coins
and creates a new coin with denomination ten, etc. This is not
too hard, using the same infrastructure you've already got; it
simply becomes part of the chain, and when the chain is accepted
consensus, then everybody can see that it happened.

Bear

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I'll try and hurry up and release the sourcecode as soon as possible to serve as a reference to help clear up all these implementation questions.

Ray Dillinger (Bear) wrote:
> When a coin is spent, the buyer and seller digitally sign a (blinded)
> transaction record.

Only the buyer signs, and there's no blinding.

> If someone double spends, then the transaction record
> can be unblinded revealing the identity of the cheater.

Identities are not used, and there's no reliance on recourse. It's all prevention.

> This is done via a fairly standard cut-and-choose
> algorithm where the buyer responds to several challenges
> with secret shares

No challenges or secret shares. A basic transaction is just what you see in the figure in section 2. A signature (of the buyer) satisfying the public key of the previous transaction, and a new public key (of the seller) that must be satisfied to spend it the next time.

> They may also receive chains as long as the one they're trying to
> extend while they work, in which the last few "links" are links
> that are *not* in common with the chain on which they're working.
> These they ignore.

Right, if it's equal in length, ties are broken by keeping the earliest one received.

> If it contains a double spend, then they create a "transaction"
> which is a proof of double spending, add it to their pool A,
> broadcast it, and continue work.

There's no need for reporting of "proof of double spending" like that. If the same chain contains both spends, then the block is invalid and rejected.

Same if a block didn't have enough proof-of-work. That block is invalid and rejected. There's no need to circulate a report about it. Every node could see that and reject it before relaying it.

If there are two competing chains, each containing a different version of the same transaction, with one trying to give money to one person and the other trying to give the same money to someone else, resolving which of the spends is valid is what the whole proof-of-work chain is about.

We're not "on the lookout" for double spends to sound the alarm and catch the cheater. We merely adjudicate which one of the spends is valid. Receivers of transactions must wait a few blocks to make sure that resolution has had time to complete. Would be cheaters can try and simultaneously double-spend all they want, and all they accomplish is that within a few blocks, one of the spends becomes valid and the others become invalid. Any later double-spends are immediately rejected once there's already a spend in the main chain.

Even if an earlier spend wasn't in the chain yet, if it was already in all the nodes' pools, then the second spend would be turned away by all those nodes that already have the first spend.

> If the new chain is accepted, then they give up on adding their
> current link, dump all the transactions from pool L back into pool
> A (along with transactions they've received or created since
> starting work), eliminate from pool A those transaction records
> which are already part of a link in the new chain, and start work
> again trying to extend the new chain.

Right. They also refresh whenever a new transaction comes in, so L pretty much contains everything in A all the time.

> CPU-intensive digital signature algorithm to
> sign the chain including the new block L.

It's a Hashcash style SHA-256 proof-of-work (partial pre-image of zero), not a signature.

> Is there a mechanism to make sure that the "chain" does not consist
> solely of links added by just the 3 or 4 fastest nodes? 'Cause a
> broadcast transaction record could easily miss those 3 or 4 nodes
> and if it does, and those nodes continue to dominate the chain, the
> transaction might never get added.

If you're thinking of it as a CPU-intensive digital signing, then you may be thinking of a race to finish a long operation first and the fastest always winning.

The proof-of-work is a Hashcash style SHA-256 collision finding. It's a memoryless process where you do millions of hashes a second, with a small chance of finding one each time. The 3 or 4 fastest nodes' dominance would only be proportional to their share of the total CPU power. Anyone's chance of finding a solution at any time is proportional to their CPU power.

There will be transaction fees, so nodes will have an incentive to receive and include all the transactions they can. Nodes will eventually be compensated by transaction fees alone when the total coins created hits the pre-determined ceiling.

> Also, the work requirement for adding a link to the chain should
> vary (again exponentially) with the number of links added to that
> chain in the previous week, causing the rate of coin generation
> (and therefore inflation) to be strictly controlled.

Right.

> You need coin aggregation for this to scale. There needs to be
> a "provable" transaction where someone retires ten single coins
> and creates a new coin with denomination ten, etc.

Every transaction is one of these. Section 9, Combining and Splitting Value.

Satoshi Nakamoto

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On Sat, 2008-11-15 at 12:43 +0800, Satoshi Nakamoto wrote:

> I'll try and hurry up and release the sourcecode as soon as possible
> to serve as a reference to help clear up all these implementation
> questions.

> Ray Dillinger (Bear) wrote:
> > When a coin is spent, the buyer and seller digitally sign a (blinded)
> > transaction record.
>
> Only the buyer signs, and there's no blinding.
>
>
> > If someone double spends, then the transaction record
> > can be unblinded revealing the identity of the cheater.
>
> Identities are not used, and there's no reliance on recourse. It's all prevention.

Okay, that's surprising. If you're not using buyer/seller
identities, then you are not checking that a spend is being made
by someone who actually is the owner of (on record as having
recieved) the coin being spent.

There are three categories of identity that are useful to
think about. Category one: public. Real-world identities
are a matter of record and attached to every transaction.
Category two: Pseudonymous. There are persistent "identities"
within the system and people can see if something was done by
the same nym that did something else, but there's not necessarily
any way of linking the nyms with real-world identities. Category
three: unlinkably anonymous. There is no concept of identity,
persistent or otherwise. No one can say or prove whether the
agents involved in any transaction are the same agents as involved
in any other transaction.

Are you claiming category 3 as you seem to be, or category 2?
Lots of people don't distinguish between anonymous and
pseudonymous protocols, so it's worth asking exactly what
you mean here.

Anyway: I'll proceed on the assumption that you meant very
nearly (as nearly as I can imagine, anyway) what you said,
unlinkably anonymous. That means that instead of an "identity",
a spender has to demonstrate knowledge of a secret known only
to the real owner of the coin. One way to do this would be
to have the person recieving the coin generate an asymmetric
key pair, and then have half of it published with the
transaction. In order to spend the coin later, s/he must
demonstrate posession of the other half of the asymmetric
key pair, probably by using it to sign the key provided by
the new seller. So we cannot prove anything about "identity",
but we can prove that the spender of the coin is someone who
knows a secret that the person who recieved the coin knows.

And what you say next seems to confirm this:

> No challenges or secret shares. A basic transaction is just
> what you see in the figure in section 2. A signature (of the
> buyer) satisfying the public key of the previous transaction,
> and a new public key (of the seller) that must be satisfied to
> spend it the next time.

Note, even though this doesn't involve identity per se, it still
makes the agent doing the spend linkable to the agent who
earlier recieved the coin, so these transactions are linkable.
In order to counteract this, the owner of the coin needs to
make a transaction, indistinguishable to others from any
normal transaction, in which he creates a new key pair and
transfers the coin to its posessor (ie, has one sock puppet
"spend" it to another). No change in real-world identity of
the owner, but the transaction "linkable" to the agent who spent
the coin is unlinked. For category-three unlinkability, this
has to be done a random number of times - maybe one to six
times?

BTW, could you please learn to use carriage returns?? Your
lines are scrolling stupidly off to the right and I have to
scroll to see what the heck you're saying, then edit to add
carriage returns before I respond.

> > If it contains a double spend, then they create a "transaction"
> > which is a proof of double spending, add it to their pool A,
> > broadcast it, and continue work.

> There's no need for reporting of "proof of double spending" like
> that. If the same chain contains both spends, then the block is
> invalid and rejected.

> Same if a block didn't have enough proof-of-work. That block is
> invalid and rejected. There's no need to circulate a report
> about it. Every node could see that and reject it before relaying it.

Mmmm. I don't know if I'm comfortable with that. You're saying
there's no effort to identify and exclude nodes that don't
cooperate? I suspect this will lead to trouble and possible DOS
attacks.

> If there are two competing chains, each containing a different
> version of the same transaction, with one trying to give money
> to one person and the other trying to give the same money to
> someone else, resolving which of the spends is valid is what
> the whole proof-of-work chain is about.

Okay, when you say "same" transaction, and you're talking about
transactions that are obviously different, you mean a double
spend, right? Two transactions signed with the same key?

> We're not "on the lookout" for double spends to sound the alarm
> and catch the cheater. We merely adjudicate which one of the
> spends is valid. Receivers of transactions must wait a few
> blocks to make sure that resolution has had time to complete.

Until.... until what? How does anybody know when a transaction
has become irrevocable? Is "a few" blocks three? Thirty? A
hundred? Does it depend on the number of nodes? Is it logarithmic
or linear in number of nodes?

> Would be cheaters can try and simultaneously double-spend all
> they want, and all they accomplish is that within a few blocks,
> one of the spends becomes valid and the others become invalid.

But in the absence of identity, there's no downside to them
if spends become invalid, if they've already recieved the
goods they double-spent for (access to website, download,
whatever). The merchants are left holding the bag with
"invalid" coins, unless they wait that magical "few blocks"
(and how can they know how many?) before treating the spender
as having paid.

The consumers won't do this if they spend their coin and it takes
an hour to clear before they can do what they spent their coin on.
The merchants won't do it if there's no way to charge back a
customer when they find the that their coin is invalid because
the customer has doublespent.

> Even if an earlier spend wasn't in the chain yet, if it was
> already in all the nodes' pools, then the second spend would
> be turned away by all those nodes that already have the first
> spend.

So there's a possibility of an early catch when the broadcasts of
the initial simultaneous spends interfere with each other. I assume
here that the broadcasts are done by the sellers, since the buyer
has a possible disincentive to broadly disseminate spends.

> > If the new chain is accepted, then they give up on adding their
> > current link ... and start work again trying to extend the new
> > chain.
>
> Right. They also refresh whenever a new transaction comes in,
> so L pretty much contains everything in A all the time.

Okay, that's a big difference between a proof of work that takes
a huge set number of CPU cycles and a proof of work that takes a
tiny number of CPU cycles but has a tiny chance of success. You
can change the data set while working, and it doesn't mean you
need to start over. This is good in this case, as it means nobody
has to hold recently recieved transactions out of the link they're
working on.

> > Is there a mechanism to make sure that the "chain" does not consist
> > solely of links added by just the 3 or 4 fastest nodes?

> If you're thinking of it as a CPU-intensive digital signing, then
> you may be thinking of a race to finish a long operation first and
> the fastest always winning.

Right. That was the misconception I was working with. Again, the
difference between a proof taking a huge set number of CPU cycles
and a proof that takes a tiny number of CPU cycles but has a tiny
chance of success.

> Anyone's chance of finding a solution at any
> time is proportional to their CPU power.

It's like a random variation in the work factor; in this way it works
in your favor.

> There will be transaction fees, so nodes will have an incentive
> to receive and include all the transactions they can. Nodes
> will eventually be compensated by transaction fees alone when
> the total coins created hits the pre-determined ceiling.

I don't understand how "transaction fees" would work, and how the money
would find its way from the agents doing transactions to those running
the network. But the economic effect is the same (albeit somewhat
randomized) if adding a link to the chain allows the node to create
a coin, so I would stick with that.

Also, be aware that the compute power of different nodes can be
expected to vary by two orders of magnitude at any given moment in
history.

Bear

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Ray Dillinger wrote:
> One way to do this would be
> to have the person recieving the coin generate an asymmetric
> key pair, and then have half of it published with the
> transaction. In order to spend the coin later, s/he must
> demonstrate posession of the other half of the asymmetric
> key pair, probably by using it to sign the key provided by
> the new seller.

Right, it's ECC digital signatures. A new key pair is used for every
transaction.

It's not pseudonymous in the sense of nyms identifying people, but it
is at least a little pseudonymous in that the next action on a coin
can be identified as being from the owner of that coin.

> Mmmm. I don't know if I'm comfortable with that. You're saying
> there's no effort to identify and exclude nodes that don't
> cooperate? I suspect this will lead to trouble and possible DOS
> attacks.

There is no reliance on identifying anyone. As you've said, it's
futile and can be trivially defeated with sock puppets.

The credential that establishes someone as real is the ability to
supply CPU power.

> Until.... until what? How does anybody know when a transaction
> has become irrevocable? Is "a few" blocks three? Thirty? A
> hundred? Does it depend on the number of nodes? Is it logarithmic
> or linear in number of nodes?

Section 11 calculates the worst case under attack. Typically, 5 or
10 blocks is enough for that. If you're selling something that
doesn't merit a network-scale attack to steal it, in practice you
could cut it closer.

> But in the absence of identity, there's no downside to them
> if spends become invalid, if they've already received the
> goods they double-spent for (access to website, download,
> whatever). The merchants are left holding the bag with
> "invalid" coins, unless they wait that magical "few blocks"
> (and how can they know how many?) before treating the spender
> as having paid.
>
> The consumers won't do this if they spend their coin and it takes
> an hour to clear before they can do what they spent their coin on.
> The merchants won't do it if there's no way to charge back a
> customer when they find the that their coin is invalid because
> the customer has doublespent.

This is a version 2 problem that I believe can be solved fairly
satisfactorily for most applications.

The race is to spread your transaction on the network first. Think 6
degrees of freedom -- it spreads exponentially. It would only take
something like 2 minutes for a transaction to spread widely enough
that a competitor starting late would have little chance of grabbing
very many nodes before the first one is overtaking the whole network.
During those 2 minutes, the merchant's nodes can be watching for a
double-spent transaction. The double-spender would not be able to
blast his alternate transaction out to the world without the merchant
getting it, so he has to wait before starting.

If the real transaction reaches 90% and the double-spent tx reaches
10%, the double-spender only gets a 10% chance of not paying, and 90%
chance his money gets spent. For almost any type of goods, that's
not going to be worth it for the scammer.

Information based goods like access to website or downloads are
non-fencible. Nobody is going to be able to make a living off
stealing access to websites or downloads. They can go to the file
sharing networks to steal that. Most instant-access products aren't
going to have a huge incentive to steal.

If a merchant actually has a problem with theft, they can make the
customer wait 2 minutes, or wait for something in e-mail, which many
already do. If they really want to optimize, and it's a large
download, they could cancel the download in the middle if the
transaction comes back double-spent. If it's website access,
typically it wouldn't be a big deal to let the customer have access
for 5 minutes and then cut off access if it's rejected. Many such
sites have a free trial anyway.

Satoshi Nakamoto

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Satoshi Nakamoto wrote:
> Fortunately, it's only necessary to keep a
> pending-transaction pool for the current best branch.

This requires that we know, that is to say an honest
well behaved peer whose communications and data storage
is working well knows, what the current best branch is -
but of course, the problem is that we are trying to
discover, trying to converge upon, a best branch, which
is not easy at the best of times, and becomes harder
when another peer is lying about its connectivity and
capabilities, and yet another peer has just had a major
disk drive failure obfuscated by a software crash, and
the international fibers connecting yet a third peer
have been attacked by terrorists.

> When a new block arrives for the best branch,
> ConnectBlock removes the block's transactions from
> the pending-tx pool. If a different branch becomes
> longer

Which presupposes the branches exist, that they are
fully specified and complete. If they exist as complete
works, rather than works in progress, then the problem
is already solved, for the problem is making progress.

> Broadcasts will probably be almost completely
> reliable.

There is a trade off between timeliness and reliability.
One can make a broadcast arbitrarily reliable if time is
of no consequence. However, when one is talking of
distributed data, time is always of consequence, because
it is all about synchronization (that peers need to have
corresponding views at corresponding times) so when one
does distributed data processing, broadcasts are always
highly unreliable Attempts to ensure that each
message arrives at least once result in increased timing
variation. Thus one has to make a protocol that is
either UDP or somewhat UDP like, in that messages are
small, failure of messages to arrive is common, messages
can arrive in different order to the order in which they
were sent, and the same message may arrive multiple
times. Either we have UDP, or we need to accommodate
the same problems as UDP has on top of TCP connections.

Rather than assuming that each message arrives at least
once, we have to make a mechanism such that the
information arrives even though conveyed by messages
that frequently fail to arrive.

> TCP transmissions are rarely ever dropped these days

People always load connections near maximum. When a
connection is near maximum, TCP connections suffer
frequent unreasonably long delays, and connections
simply fail a lot - your favorite web cartoon somehow
shows it is loading forever, and you try again, or it
comes up with a little x in place of a picture, and you
try again

Further very long connections - for example ftp
downloads of huge files, seldom complete. If you try to
ftp a movie, you are unlikely to get anywhere unless
both client and server have a resume mechanism so that
they can talk about partially downloaded files.

UDP connections, for example Skype video calls, also
suffer frequent picture freezes, loss of quality, and so
forth, and have to have mechanisms to keep going
regardless.

> It's very attractive to the libertarian viewpoint if
> we can explain it properly. I'm better with code than
> with words though.

No, it is very attractive to the libertarian if we can
design a mechanism that will scale to the point of
providing the benefits of rapidly irreversible payment,
immune to political interference, over the internet,
to very large numbers of people. You have an outline
and proposal for such a design, which is a big step
forward, but the devil is in the little details.

I really should provide a fleshed out version of your
proposal, rather than nagging you to fill out the blind
spots.

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James A. Donald wrote:
> > Fortunately, it's only necessary to keep a
> > pending-transaction pool for the current best branch.
>
> This requires that we know, that is to say an honest
> well behaved peer whose communications and data storage
> is working well knows, what the current best branch is -

I mean a node only needs the pending-tx pool for the best branch it
has. The branch that it currently thinks is the best branch.
That's the branch it'll be trying to make a block out of, which is
all it needs the pool for.

> > Broadcasts will probably be almost completely
> > reliable.
>
> Rather than assuming that each message arrives at least
> once, we have to make a mechanism such that the
> information arrives even though conveyed by messages
> that frequently fail to arrive.

I think I've got the peer networking broadcast mechanism covered.

Each node sends its neighbours an inventory list of hashes of the
new blocks and transactions it has. The neighbours request the
items they don't have yet. If the item never comes through after a
timeout, they request it from another neighbour that had it. Since
all or most of the neighbours should eventually have each item,
even if the coms get fumbled up with one, they can get it from any
of the others, trying one at a time.

The inventory-request-data scheme introduces a little latency, but
it ultimately helps speed more by keeping extra data blocks off the
transmit queues and conserving bandwidth.

> You have an outline
> and proposal for such a design, which is a big step
> forward, but the devil is in the little details.

I believe I've worked through all those little details over the
last year and a half while coding it, and there were a lot of them.
The functional details are not covered in the paper, but the
sourcecode is coming soon. I sent you the main files.
(available by request at the moment, full release soon)

Satoshi Nakamoto

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On Fri, Nov 14, 2008 at 11:04:21PM -0800, Ray Dillinger wrote:
> On Sat, 2008-11-15 at 12:43 +0800, Satoshi Nakamoto wrote:
> > > If someone double spends, then the transaction record
> > > can be unblinded revealing the identity of the cheater.
> >
> > Identities are not used, and there's no reliance on recourse. It's all prevention.
>
> Okay, that's surprising. If you're not using buyer/seller
> identities, then you are not checking that a spend is being made
> by someone who actually is the owner of (on record as having
> recieved) the coin being spent.

How do identities help? It's supposed to be anonymous cash, right? And
say you identify a double spender after the fact, then what? Perhaps
you're looking at a disposable ID. Or perhaps you can't chase them
down.

Double spend detection needs to be real-time or near real-time.

Nico
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Ray Dillinger wrote:
> Okay.... I'm going to summarize this protocol as I
> understand it.
>
> I'm filling in some operational details that aren't in
> the paper by supplementing what you wrote with what my
> own "design sense" tells me are critical missing bits
> or "obvious" methodologies for use.

There are a number of significantly different ways this
could be implemented. I have been working on my own
version based on Patricia hash trees, (not yet ready to
post, will post in a week or so) with the consensus
generation being a generalization of file sharing using
Merkle hash trees. Patricia hash trees where the high
order part of the Patricia key represents the high order
part of the time can be used to share data that evolves
in time. The algorithm, if implemented by honest
correctly functioning peers, regularly generates
consensus hashes of the recent past - thereby addressing
the problem I have been complaining about - that we have
a mechanism to protect against consensus distortion by
dishonest or malfunctioning peers, which is useless
absent a definition of consensus generation by honest
and correctly functioning peers.

> First, people spend computer power creating a pool of
> coins to use as money. Each coin is a proof-of-work
> meeting whatever criteria were in effect for money at
> the time it was created. The time of creation (and
> therefore the criteria) is checkable later because
> people can see the emergence of this particular coin
> in the transaction chain and track it through all its
> "consensus view" spends. (more later on coin creation
> tied to adding a link).
>
> When a coin is spent, the buyer and seller digitally
> sign a (blinded) transaction record, and broadcast it
> to a bunch of nodes whose purpose is keeping track of
> consensus regarding coin ownership.

I don't think your blinding works.

If there is a public record of who owns what coin, we
have to generate a public diff on changes in that
record, so the record will show that a coin belonged to
X, and soon thereafter belonged to Y. I don't think
blinding can be made to work. We can blind the
transaction details easily enough, by only making hashes
of the details public, (X paid Y for
49vR7xmwYcKXt9zwPJ943h9bHKC2pG68m) but that X paid Y is
going to be fairly obvious.

If when Joe spends a coin to me, then I have to have the
ability to ask "Does Joe rightfully own this coin", then
it is difficult to see how this can be implemented in a
distributed protocol without giving people the ability
to trawl through data detecting that Joe paid me.

To maintain a consensus on who owns what coins, who owns
what coins has to be public.

We can build a privacy layer on top of this - account
money and chaumian money based on bitgold coins, much as
the pre 1915 US banking system layered account money and
bank notes on top of gold coins, and indeed we have to
build a layer on top to bring the transaction cost down
to the level that supports agents performing micro
transactions, as needed for bandwidth control, file
sharing, and charging non white listed people to send us
communications.

So the entities on the public record are entities
functioning like pre 1915 banks - let us call them
binks, for post 1934 banks no longer function like that.

> But if they recieve a _longer_ chain while working,
> they immediately check all the transactions in the new
> links to make sure it contains no double spends and
> that the "work factors" of all new links are
> appropriate.

I am troubled that this involves frequent
retransmissions of data that is already mostly known.
Consensus and widely distributed beliefs about bitgold
ownership already involves significant cost. Further,
each transmission of data is subject to data loss, which
can result in thrashing, with the risk that the
generation of consensus may slow below the rate of new
transactions. We already have problems getting the cost
down to levels that support micro transactions by
software agents, which is the big unserved market -
bandwidth control, file sharing, and charging non white
listed people to send us communications.

To work as useful project, has to be as efficient as it
can be - hence my plan to use a Patricia hash tree
because it identifies and locate small discrepancies
between peers that are mostly in agreement already,
without them needing to transmit their complete data.

We also want to avoid very long hash chains that have to
be frequently checked in order to validate things. Any
time a hash chain can potentially become enormously long
over time, we need to ensure that no one ever has to
rewalk the full length. Chains that need to be
re-walked can only be permitted to grow as the log of
the total number of transactions - if they grow as the
log of the transactions in any one time period plus the
total number of time periods, we have a problem.

> Biggest Technical Problem:
>
> Is there a mechanism to make sure that the "chain"
> does not consist solely of links added by just the 3
> or 4 fastest nodes? 'Cause a broadcast transaction
> record could easily miss those 3 or 4 nodes and if it
> does, and those nodes continue to dominate the chain,
> the transaction might never get added.
>
> To remedy this, you need to either ensure provable
> propagation of transactions, or vary the work factor
> for a node depending on how many links have been added
> since that node's most recent link.
>
> Unfortunately, both measures can be defeated by sock
> puppets. This is probably the worst problem with your
> protocol as it stands right now; you need some central
> point to control the identities (keys) of the nodes
> and prevent people from making new sock puppets.

We need a protocol wherein to be a money tracking peer
(an entity that validates spends) you have to be
accepted by at least two existing peers who agree to
synchronize data with you - presumably through human
intervention by the owners of existing peers, and these
two human approved synchronization paths indirectly
connect you to the other peers in the network through
at least one graph cycle.

If peer X is only connected to the rest of the network
by one existing peer, peer Y, perhaps because X's
directly connecting peer has dropped out, then X is
demoted to a client, not a peer - any transactions X
submits are relabeled by Y as submitted to Y, not X, and
the time of submission (which forms part of the Patricia
key) is the time X submitted them to Y, not the time
they were submitted to X.

The algorithm must be able swiftly detect malfunctioning
peers, and automatically exclude them from the consensus
temporarily - which means that transactions submitted
through malfunctioning peers do not get included in the
consensus, therefore have to be resubmitted, and peers
may find themselves temporarily demoted to clients,
because one of the peers through which they were
formerly connected to the network has been dropped by
the consensus.

If a peer gets a lot of automatic temporary exclusions,
there may be human intervention by the owners of those
peers to which it exchanges data directly to permanently
drop them.

Since peers get accepted by human invite, they have
reputation to lose, therefore we can make the null
hypothesis (the primary Bayesian prior) honest intent,
valid data, but unreliable data transmission - trust
with infrequent random verification. Designing the
system on this basis considerably reduces processing
costs.

Recall that SET died on its ass in large part because
every transaction involved innumerable public key
operations. Similarly, we have huge security flaws in
https because it has so many redundant public key
operations that web site designers try to minimize the
use of https to cover only those areas that truly need
it - and they always get the decision as to what truly
needs it subtly wrong.

Efficiency is critical, particularly as the part of the
market not yet served is the market for very low cost
transactions.

> If we solve the sock-puppet issue, or accept that
> there's a central point controlling the generation of
> new keys,

A central point will invite attack, will be attacked.

The problem with computer networked money is that the
past can so easily be revised, so nodes come under
pressure to adjust the past - "I did not pay that"
swiftly becomes "I should not have paid that", which
requires arbitration, which is costly, and introduces
uncertainty, which is costly, and invites government
regulation, which is apt to be utterly ruinous and
wholly devastating.

For many purposes, reversal and arbitration is highly
desirable, but there is no way anyone can compete with
the arbitration provided by Visa and Mastercard, for
they have network effects on their side, and they do a
really good job of arbitration, at which they have vast
experience, accumulated skills, wisdom, and good repute.
So any new networked transaction system has to target
the demand for final and irreversible transactions.

The idea of a distributed network consensus is that one
has a lot of peers in a lot of jurisdictions, and once a
transaction has entered into the consensus, undoing it
is damn near impossible - one would have to pressure
most of the peers in most of the jurisdictions to agree,
and many of them don't even talk your language, and
those that do, will probably pretend that they do not.
So people will not even try.

To avoid pressure, the network has to avoid any central
point at which pressure can be applied. Recall Nero's
wish that Rome had a single throat that he could cut. If
we provide them with such a throat, it will be cut.

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Nicolas Williams wrote:
> How do identities help? It's supposed to be anonymous
> cash, right?

Actually no. It is however supposed to be pseudonymous,
so dinging someone's reputation still does not help
much.

> And say you identify a double spender after the fact,
> then what? Perhaps you're looking at a disposable ID.
> Or perhaps you can't chase them down.
>
> Double spend detection needs to be real-time or near
> real-time.

Near real time means we have to use UDP or equivalent,
rather than TCP or equivalent, and we have to establish
an approximate consensus, not necessarily the final
consensus, not necessarily exact agreement, but close to
it, in a reasonably small number of round trips.

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