Directly from one party to another: Craig Wright explains Bitcoin

Getting your Trinity Audio player ready...

Dr. Craig Wright recently released a blog post explaining the first sentence of the Bitcoin white paper in detail. It’s almost 3,000 words dedicated to explaining key and basic concepts about Bitcoin that are still misunderstood. You can read it here.

Dr. Wright opens the blog by saying that he is frustrated by the lack of understanding of what he considers basic terms and concepts in the white paper. So, in this post, he will explain the first sentence of his white paper in detail.

Direct payments from one party to another

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

The very first sentence of the Bitcoin white paper notes that payments can be sent directly from one party to another. This does not say it’s done by sending it through multiple hops. If you send a payment to a node and someone collects from that node, then the node is an intermediary.

In Dr. Wright’s example, Alice wants to pay Bob, so she directly gives Bob a transaction in exchange for goods and services. On the other hand, Bob wants to make sure she didn’t double-spend the transaction. For Bob to be sure the transaction is valid, he has to register ownership of the transaction with the nodes. The tokens Alice sent him stay with Bob, and the transaction record stays on the blockchain.

Elaborating, Dr. Wright explains that, provided Alice has not cheated, Bob will have his ownership recorded on the blockchain. His ownership can then be asserted. Peer-to-peer transactions work like this. Furthermore, Bob can be notified within a fraction of a second whether the transaction is valid. He can also check again in a few seconds for added certainty.

If Alice does cheat, she will have committed fraud and left evidence on the blockchain, which can be used in a court of law. Digital signatures, a fundamental element of the Bitcoin system, provide good evidence that can be used in prosecuting anyone who commits such fraud.

Zooming in on the meaning of various words in the first sentence

Dr. Wright then goes deeper and focuses on specific words in the first sentence of the Bitcoin white paper. He wants to be crystal clear about what they mean. 

Purely means entirely or exclusively done in a pure manner. A pure peer-to-peer system must send electronic cash directly without exception. Dr. Wright explains that when Bitcoin was created, it was sent IP to IP, not to a wallet address, but to an IPv4 or IPv6 network address.

Electronic cash is not digital gold, obviously. The electronic part is self-explanatory. Cash is money in the form of coins or notes. By contrast, bank checks are not cash because you get the money from an intermediary. On the other hand, banknotes or negotiable instruments are recognized as cash. Cash is ready money that is quickly exchanged and settled. You can quickly verify if it is real and check whether a spender has deceived you.

Dr. Wright is not satisfied with what people say about the meaning of peer-to-peer today. He says that many commonly accepted definitions are Chinese whispers of the originals. He says that when he created Bitcoin, he used the terminology most regarded at the time. He refers to a paper by Schollmeier in which the different concepts of peer-to-peer networks were defined. A pure peer-to-peer network is one where there are no servers. A pure peer-to-peer system like Bitcoin enables users to exchange value directly. Obviously, directly does not involve going through someone else’s node. By definition, sending something to anyone other than the final party is not peer-to-peer.

The way many people use blockchains is wrong and, according to Dr. Wright, and by definition, is not peer-to-peer. Decentralization means pushing information to the edges, he says. No central node network should control everything. No small group of developers should set rules and arbitrarily change them. Decentralization refers to individuals being able to exchange information and minority groups being able to act independently.

On the role of nodes in peer-to-peer transactions

Delving deeper into the role of nodes, Dr. Wright explains that nodes are not irrelevant. The Bitcoin white paper does not say that.

However, the first sentence says payments can “be sent directly without going through a financial institution.” When Alice gives a transaction and related tokens to Bob, nothing goes through nodes. Nodes don’t decide whether the transaction is finalized and recorded. Bob decides this. Bob has received payment directly from Alice in exchange for goods or services. In the exchange, the nodes do nothing more than accept a time-ordered transaction from Bob and record it.

When Bob sends his transaction to the network, he doesn’t broadcast to one node. He sends it to all the nodes he can see. The nodes are paid a small fee to record Bob’s info. They act under an agency agreement through a unilateral contract with the issuer. Dr. Wright is the issuer and responsible party in Bitcoin. In the Bitcoin system, nodes act as honest agents to record the information returning information related to the validity of the transactions. This is what a node is paid for.

Digging even deeper and explaining how Bitcoin is subject to the law, Dr. Wright explains that when a node registers Bob’s transaction, it adds it to a block. However, the block is not yet valid. Only one block will be validated via the proof of work process. All nodes can reference the order of transactions, so if a miner disputes the order, there’s evidence to prove that one of the nodes is acting dishonestly. This evidence can be presented in court since dishonest nodes are committing a computer crime. He tells us this is covered by various computer crime legislation around the world.

Furthermore, nodes don’t care about transaction details. They assume the owner of the transaction is the possessor unless there is evidence to the contrary. Evidence of ownership can be provided in court if necessary. Court orders can quickly alert the entire network of nodes and operators when there is malfeasance.

Are nodes financial institutions?

Dr. Wright explains that some argue that nodes act as a financial institution. However, for small casual payments, a node is not acting in any way that could be seen as a trusted intermediary. He says that recording information and provision of notary services differ from what would create a financial institution. On the contrary, financial institutions can’t process micropayments because of the controls they need to implement.

Dr. Wright highlights that nodes do not create rules—they enforce them. Nodes act as notaries, recording transactions and following a predefined set of rules. In this function, nodes do not act as financial institutions. They provide a service for the payment of fees. What service? Recording transactions and rejecting attempts at sending the same input values more than once.

Dr. Wright explains that inputs in Bitcoin can only be spent once. The double hash function doesn’t allow transaction IDs (TXID) collisions. There’s no capability to have a TXID occur more than once in the Bitcoin system.

Speaking more about legal obligations, Dr. Wright tells us that Bob and Alice must ensure they follow the rules in their jurisdiction. This system mirrors cash. When Alice sends a transaction to Bob, she communicates directly with him. It’s up to Alice and Bob to check legally required transaction information. Collecting info concerning AML/KYC provisions does not need to fall upon nodes. For example, if Alice hands Bob $11,000, he’ll need to record it in most jurisdictions. Bitcoin allows for the private and secures storing of this information which can be proved forensically if necessary.

A summary of the first sentence of the Bitcoin white paper

Dr. Wright reiterates that Bitcoin is a direct communication system. It allows Alice to talk to Bob directly and send electronic cash. This part doesn’t require the nodes. Bob simply uses the nodes to validate the transaction. He can send the transaction for processing any time he wants, but it’s at risk until the nodes verify it.

In studying Master of Laws (LLM), Dr. Wright understood that nodes would not be liable for the actions of other parties if they followed the rules, implemented required legal changes, and acted as a library in reference to publishing. It’s a commercial system that acts within the law, he says.

Finishing up, Dr. Wright says he is frustrated that he has to explain basic points 14 years after the paper was released. He’s angered because he created a micropayments system to allow the poorest people in the world to trade, and it’s been twisted into a criminal money laundering system and Ponzi scheme (BTC). He says he’ll be happy when his system is used as designed.