What was Bitcoin created for and what goals did its creator (or creators) under the pseudonym Satoshi Nakamoto pursue? Before the emergence of Bitcoin, all forms and methods of monetary payments were divided into two main categories:
Cash payments, which are made directly between two parties. They are convenient because they are instantaneous and do not require mutual trust between the parties. In addition, they eliminate delays in payment and the involvement of a third party intermediary. The main disadvantage of cash payments is the need for both parties to meet in the same place at the same time.
Non-cash payments (intermediary), which require the participation of a trusted third party and are made through checks, credit or debit cards, bank transfers, or systems like PayPal. Such payments, by definition, require an intermediary who facilitates the transfer of funds between the parties to the transaction. The main advantage of intermediary payments is the ability to exchange without meeting in person, and the payer does not have to carry cash with them. The main disadvantages are trust issues (you have to trust the intermediary, who may not fulfill their obligations), as well as additional costs and time that the recipient will have to wait for the funds to be finally credited before they can dispose of them.
Of course, non-cash payments also pose problems for ownership and control of money. The owner is forced to delegate the right to own their money to a third-party trustee (usually a bank) for at least the duration of the transfer. In addition, by transferring this right, the owner de facto cannot freely dispose of their money and is obliged to act within the framework of the agreement concluded between them and the bank, effectively operating within the bank's instructions.
As we can see, both types of payments have their key drawbacks:
- Cash transactions are tied to a place and time;
- Non-cash payments require intermediation.
The following tasks need to be addressed:
Ensuring trust between parties. The sender must be confident that their money transfer has reached the recipient and that they have received it. The recipient must be confident that the sender cannot cancel the sent money transfer and that the received funds will remain with them. It is necessary to ensure an accurate record of the transaction between the parties so that neither side can dispute it in the future.
The problem of "double spending". It is necessary to prevent the double spending of sent funds, ensuring that the sender cannot send the same money to two or more recipients.
For a long time, it was not possible to solve these problems without the involvement of a trusted third party. It was evident that the solution was only possible through cryptographic methods. Since cryptography is a science of ensuring confidentiality, data integrity, and authentication, many leading cryptographers struggled to create an electronic payment system without the involvement of a trusted center, but without success.
The first engineering solution that allowed for direct electronic payments without the involvement of trusted intermediaries was Bitcoin - a decentralized electronic monetary system, or as its anonymous creator Satoshi Nakamoto called it, a peer-to-peer electronic cash system.
At the heart of this engineering solution was distributed public blockchain technology (DLT), based on three essential components:
- Peer-to-peer (p2p) or peer-to-peer network.
- The blockchain itself - a database (ledger - an accounting register) in the form of cryptographically linked blocks of information containing transactions.
- The mechanism for achieving consensus - in the form of proof of work (PoW), also known as mining.
It was truly a revolutionary invention!
In addition to the above tasks, Bitcoin also solved another important problem - the uncontrolled emission of money by central banks, which was the cause of inflation.
On February 11, 2009, Satoshi Nakamoto published an article on the P2P Foundation web forum entitled "Bitcoin: A Peer-to-Peer Electronic Cash System," which directly pointed out the shortcomings of the existing monetary and financial system - we are forced to trust central banks, which print excess money and thereby devalue currency, and we are forced to trust commercial banks that hold our money...
In essence, according to Satoshi Nakamoto's plan, Bitcoin was supposed to become an alternative to our current financial system and put an end to the central banks' monopoly on money issuance, as well as commercial banks' control over transactions and money storage.
This material is not financial advice. Be careful when trading in the cryptocurrency market.