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January 21, 2021 18:18
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Abstract. A purely distributed version of value storage would allow online | |
value to be sent directly from one party to another without going through a | |
financial institution at small scale. A large scale we'll require secondary layers to provide | |
economically rational payment rails. Digital signatures provide part of the solution, but the main | |
benefits are lost if a trusted third party is still required to prevent double-spending. Trusted third party's | |
will be required in the secondary layers for those not able to remain online to monitor their utxo's. | |
We propose a solution to the double-spending problem using a distributed 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 ASIC power. As | |
long as a majority of ASIC power is controlled by ASIC miners that are not cooperating to | |
attack the network, they'll generate the longest chain and outpace attackers. The | |
network itself requires minimal structure. Messages are broadcast on a best effort | |
basis, and ASIC miners as well as node operaters can leave and rejoin the network at will, accepting the longest | |
proof-of-work chain as proof of what happened while they were gone. | |
1. Introduction | |
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as | |
trusted third parties to process electronic payments. While the system works well enough for | |
most transactions, it still suffers from the inherent weaknesses of the trust based model. | |
Completely non-reversible transactions are not really possible, since financial institutions cannot | |
avoid mediating disputes. The cost of mediation increases transaction costs, limiting the | |
minimum practical transaction size and cutting off the possibility for small casual transactions, | |
and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must | |
be wary of their customers, hassling them for more information than they would otherwise need. | |
A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties | |
can be avoided in person by using physical currency, but no mechanism exists to make payments | |
over a communications channel without a trusted party. | |
What is needed is an electronic payment value storage system based on cryptographic proof instead of trust, | |
allowing any two willing parties to transact directly with each other without the need for a trusted | |
third party. Transactions that are computationally impractical to reverse would protect sellers | |
from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In | |
this paper, we propose a solution to the double-spending problem using a distributed | |
timestamp server to generate computational proof of the chronological order of transactions. The | |
system is secure as long as honest ASIC miners collectively control more ASIC power than any | |
cooperating group of attacker ASIC miners. | |
2. Transactions | |
We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the | |
next by digitally signing a hash of the previous transaction and the public key of the next owner | |
and adding these to the end of the coin. A payee can verify the signatures to verify the chain of | |
ownership. | |
Transaction | |
Owner 1's | |
Public Key | |
Owner 0's | |
Signature | |
Hash | |
Transaction | |
Owner 2's | |
Public Key | |
Owner 1's | |
Signature | |
Hash | |
Verify | |
Transaction | |
Owner 3's | |
Public Key | |
Owner 2's | |
Signature | |
Hash | |
Verify | |
Owner 2's | |
Private Key | |
Owner 1's | |
Private Key | |
Sign | |
Sign | |
Owner 3's | |
Private Key | |
The problem of course is the payee can't verify that one of the owners did not double-spend | |
the coin. A common solution is to introduce a trusted central authority, or mint, that checks every | |
transaction for double spending. After each transaction, the coin must be returned to the mint to | |
issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent. | |
The problem with this solution is that the fate of the entire money system depends on the | |
company running the mint, with every transaction having to go through them, just like a bank. | |
We need a way for the payee to know that the previous owners did not sign any earlier | |
transactions. For our purposes, the earliest transaction is the one that counts, so we don't care | |
about later attempts to double-spend. The only way to confirm the absence of a transaction is to | |
be aware of all transactions. In the mint based model, the mint was aware of all transactions and | |
decided which arrived first. To accomplish this without a trusted party, transactions must be | |
publicly announced [1], and we need a system for participants to agree on a single history of the | |
order in which they were received. The payee needs proof that at the time of each transaction, the | |
majority of nodes agreed it was the first received. | |
3. Timestamp Server | |
The solution we propose begins with a timestamp server. A timestamp server works by taking a | |
hash of a block of items to be timestamped and widely publishing the hash, such as in a | |
newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the | |
time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in | |
its hash, forming a chain, with each additional timestamp reinforcing the ones before it. | |
4. Proof-of-Work | |
To implement a distributed timestamp server on a idstributed basis, we will need to use a proofof-work system similar to Adam Back's Hashcash [6], rather than newspaper or Usenet posts. | |
The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the | |
hash begins with a number of zero bits. The average work required is exponential in the number | |
of zero bits required and can be verified by executing a single hash. | |
For our timestamp network, we implement the proof-of-work by incrementing a nonce in the | |
block until a value is found that gives the block's hash the required zero bits. Once the ASIC | |
effort has been expended to make it satisfy the proof-of-work, the block cannot be changed | |
without redoing the work. As later blocks are chained after it, the work to change the block | |
would include redoing all the blocks after it. | |
The proof-of-work also solves the problem of determining representation in majority decision | |
making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone | |
able to allocate many IPs. Proof-of-work is essentially one-ASIC-one-vote until we involve mining pools. | |
The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested | |
in it. If a majority of ASIC power is controlled by honest ASIC miners, the honest chain will grow the | |
fastest and outpace any competing chains. To modify a past block, an attacker would have to | |
redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the | |
work of the honest ASIC miners. We will show later that the probability of a slower attacker catching up | |
diminishes exponentially as subsequent blocks are added. | |
To compensate for increasing hardware speed and varying interest in running ASIC miners 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. | |
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