Step-by-step explanation:
The inherent problem in modern-day financial transactions that Nakamoto intended to solve in the Bitcoin white paper is the reliance on trusted intermediaries, such as banks or payment processors, for verifying and facilitating transactions. These intermediaries act as central authorities, which can introduce inefficiencies, delays, costs, and potential vulnerabilities to the system. Nakamoto proposed Bitcoin as a decentralized digital currency to address these issues.
Bitcoin solves this problem by introducing a decentralized peer-to-peer network and a consensus mechanism known as proof-of-work. Here's how it works:
1. Decentralization: Bitcoin operates on a decentralized network of computers called nodes. Anyone can participate in this network, contributing their computational power and becoming part of the network consensus.
2. Trustless Transactions: In traditional financial systems, trust is placed in intermediaries to validate transactions. In Bitcoin, trust is placed in the network protocol and cryptography. Transactions are validated by the network through a process called mining, where miners compete to solve complex mathematical puzzles. Once a block of transactions is validated, it is added to the blockchain, creating an immutable record of all transactions.
3. Cryptographic Security: Bitcoin uses cryptographic techniques to secure transactions. Each participant in the network has a unique digital signature, which verifies the ownership and authenticity of the transaction. Private and public key pairs are used to sign and verify transactions, ensuring the security and integrity of the system.
4. Elimination of Intermediaries: With Bitcoin, there is no need for trusted intermediaries. Transactions are directly sent and received between participants in the network, eliminating the need for third-party verification and reducing transaction fees and processing times.
5. Limited Supply: Bitcoin has a finite supply, with a maximum cap of 21 million coins. This limited supply is intended to prevent inflation and maintain the value of the currency over time.
By combining these elements, Bitcoin aims to provide a secure, transparent, and decentralized financial system that allows individuals to transact directly with each other without the need for intermediaries. It empowers individuals to have full control over their funds and promotes financial inclusion, privacy, and censorship resistance.