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Bitcoin: its interests, its limits

Bitcoin, a term which combines the computer unit of measurement – the “bit” – and money and which could be translated as “digital coin”, is a means of exchange allowing a community of users to settle their transactions on the internet without resorting to legal tender (euro, dollar, yen, etc.).

It was created in 2008 by a certain Satoshi Nakamoto without knowing whether it was really a person or a pseudonym intended to preserve the anonymity of its creator (s). The idea initially put forward by the creator (s) of bitcoin, with reference to the work of the economist Friedrich Von Hayek (1899 – 1992), was to bypass the traditional financial system which would have shown its limits with the 2008 crisis. by promoting the appearance of currencies competing with legal currencies. 

Bitcoin, how does it work?

It is quite easy to buy bitcoin and even get free online Bitcoin. All you have to do is go to an online platform that offers this service and pay the corresponding amount in dollars, euros, or any other official currency. To be able to use bitcoin, however, it is necessary to install dedicated software (a wallet) on your computer or smartphone and to connect to the system. 

This connection allows you to create your personal account, store your bitcoins there and carry out transactions with other users: each transfer of bitcoin between wallets requires a signature using a private key generated by the system which allows you to ensure that the transaction is carried out by the holders of the portfolios. For simplicity, the user can also choose to use a platform for the custody of his bitcoin assets – a kind of online account denominated in bitcoin -, which will then ensure the detention of data attesting to the possession of bitcoins (in particular private keys) and the management of transactions initiated at the request of its customers.

The peculiarity of this system lies in its mode of verification and securing of transactions, what is called the “mining” process which consists in having members of the network with the appropriate computer equipment validate all the operations carried out in bitcoin. This means that the control of operations is entrusted not to a central authority, as in the traditional financial system, but to members of the system.

Concretely, the “miners” are responsible for grouping all the last transactions into a single “block” after ensuring their validity and adding this new block to all the blocks pre-existing in the system since its origin (the blockchain).

This blockchain is therefore comparable to an accounting ledger gathering the history of transactions that the members of the system can consult at any time, but that they cannot modify due to the very strict cryptographic rules which govern its operation. Thus, each operation carried out and validated by the mining process becomes public and irrevocable.

In order to encourage members of the system to practice mining, a reward mechanism is put in place. It consists in paying in bitcoins the miner who will be the first to validate a new block of transactions thanks to the calculation of a control value – called “fingerprint” – including the parameters of this block (such as the version number of the mining software. or timestamp), the footprint of the previous block and a random number called “nonce”.

The reward for the miner who successfully validated a block was originally 50 bitcoins. But the system provides for a halving of the amount of the reward for every 210,000 blocks created. So today that amount is only 12.5 bitcoins. As the difficulty of the mining calculation is calibrated so that the calculation time of a footprint is 10 minutes, it is possible to anticipate a division by two of the mining reward every 4 years (at a rate of 6 fingerprint calculations per hour, that is 52,500 fingerprint calculations per year and 210,000 over 4 years) and the end of the creation of bitcoins around the year 2140. 

Mining being the only way to create bitcoins, the maximum number that the system can generate is thus 21 million. Given this programmed cap and the fact that the transaction validation model is deliberately designed to be long and expensive, the question of the viability of bitcoin for transactional purposes is raised. In fact, its real interest lies more in the anonymity it provides to its users and in the tamper-proof nature of the recording of transactions made.

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Carly Blair

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