What is Bitcoin?
Etymologically, the term "Bitcoin" is a contraction of the English words "bit" (which is the smallest unit of binary information) and "coin" (which means coin). It is a digital currency that can be exchanged directly peer-to-peer without going through an intermediary. It is completely independent of any government authority and is created entirely by computers through a process called mining.
Bitcoin is the first known cryptocurrency, with all previous attempts to create a decentralized digital currency having failed.
The main characteristic of Bitcoin is its scarcity, as the system was designed to generate a maximum of 21 million bitcoins. Thus, to make the currency accessible to as many people as possible, each unit of Bitcoin is divisible into sub-units called satoshis (1 satoshi = 0.00000001 BTC).
It should be noted that the Bitcoin cryptocurrency runs on a blockchain network also called Bitcoin.
What is the origin of Bitcoin?
In 2008, an individual going by the pseudonym of Satoshi Nakamoto published a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" on an Internet forum of crypto enthusiasts. The document describes a digital currency free from government control.
At that time, the world was experiencing a financial crisis caused by the subprime mortgage crisis in the United States. This crisis is the consequence of the over-indebtedness of American households on mortgages. With the fall in real estate prices, borrowers found it increasingly difficult to repay their debts, which will cause the bankruptcy of the major commercial banks. Governments around the world will therefore go into debt to save these banks, and one thing leading to another, this will lead to an almost general devaluation of the currency. This will raise the question of trust in banks to sustain the investments of their customers, that of trust in States to protect the heritage of their citizens, and consequently, that of trust in the fiduciary currency governed by governments.
As far as he is concerned, Satoshi refuses to rely on a financial system deemed so fallible. It, therefore, proposes a currency that will not require any of the players in traditional finance to exist. He is then joined by a number of developers to implement his project. So, in January 2009, the Bitcoin network was launched and the first bitcoin transfer took place.
At present, Nakamoto's identity remains unknown. He continued to work on the project until 2010. Today the system is developed by an independent community of developers, companies, and organizations.
How does the Bitcoin Network Works?
Bitcoin is a decentralized network that records transactions in real-time in a distributed ledger.
These records are made by computers (or nodes) which are responsible for validating or not the transactions made by users of the system.
Transactions are aggregated into blocks every 10 minutes and distributed to all nodes in the network.
Nodes, called miners, verify each block of transactions in order to receive bitcoin rewards. To do this, they must provide proof that they are actively participating in the network (proof of work) by deploying significant computing power to solve a complex mathematical equation. The first to find the solution will receive the reward.
But first, once the solution has been found, the block will be sent to all the other miners for verification, in order to avoid any attempt at cheating.
If the majority of miners validate the block in question, then the signature (hash) of the previous block will be added to the bottom of the current block and the latter will be added after its predecessor. It is this consecutive sequence of blocks that makes up the Bitcoin blockchain.
What are the advantages and limitations of Bitcoin?
Bitcoin has many advantages, namely:
- Its rarity: the fact that the total supply of bitcoins is limited makes it a safe haven. This is why Bitcoin is often equated with digital gold;
- Its accessibility: Bitcoin is intended to be a universal currency, which means that it can be used as a means of payment by everyone, regardless of geographical location or social class;
- Ease of use: To use bitcoin as a currency, all you have to do is download a digital wallet on your mobile phone. Additionally, bitcoin money transfers are facilitated by various existing applications that offer user-friendly interfaces and enable fast and secure payments by scanning the address of recipients;
- The speed of transactions and low transaction costs;
- No ceiling for the amounts to be transferred;
- Confidentiality of Transactions.
Despite the advantages presented above, bitcoin still faces several threats, including:
- Volatility: Bitcoin is an extremely volatile cryptocurrency and this instability is not very reassuring;
- Legal uncertainty: a government may decide to ban the use of Bitcoin making it an illegal currency;
- Scalability: the Bitcoin network is not yet able to handle a large number of transactions per second. The simultaneous arrival of many users on the network could cause system congestion;
- Bitcoin scams: As these scams multiply, they tarnish the image of Bitcoin and thus hinder its adoption;