To process electronic payments, Internet commerce has come to rely almost entirely on financial institutions acting as trusted third parties. While the system is adequate for most transactions, it suffers from the inherent flaws of the trust-based model.
Because financial institutions cannot conduct completely irreversible transactions, they are not really possible.
Avoid mediating conflicts. The cost of mediation raises transaction costs, limiting the availability of services.
Minimum transaction size and elimination of the possibility of small casual transactions
There is also a broader cost associated with the inability to make non-reversible payments for non-reversible services. The need for trust grows as the possibility of reversal grows. Retailers must
be wary of their customers, hounding them for more information than they need.
A certain amount of fraud is considered unavoidable. In person, these costs and payment uncertainties can be avoided by using physical currency, but there is no mechanism for making payments over a communications channel without a trusted party.
What is required is an electronic payment system based on cryptographic proof rather than 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 by using a peer-to-peer distributed timestamp server to generate computational proof of transaction chronological order.
The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.