In order to have a peer-to-peer electronic cash system, a monetary unit must be transferable between two parties:
- Peer-to-peer without involving a third party
- With final settlement
- Without counterparty risk
Of the three, the hardest to replicate is the lack of involvement by third parties. Until the invention of Bitcoin, this was widely considered impossible within the field of computer science. All previous attempts to create electronic cash ended up needing a central authority. The fundamental problem was that, prior to the invention of Proof-of-Work mining, there was no way for a distributed network of computers to agree on the time-ordering of events. All such problems had to be solved by relying on a central timekeeping source and, as a result, peer-to-peer electronic cash couldn’t be implemented.
Curiously, Proof-of-Work mining also solves the problem of settlement finality in a decentralised transaction record. The costliness of block creation not only proves the passage of time, enabling correct transaction ordering, but also imparts equal costliness to the creation of true or false histories. So long as more than half of block producers are acting honestly, this costliness ensures that the transaction history cannot be rewritten. Finally, counterparty risk is eliminated by creating and utilising an asset native to the system – in this case, bitcoin. Thus a transaction cannot take place unless the spender actually controls the bitcoin they intend to send, once again mimicking physical cash.