Oct. 2020
In this article, we will come back to the origins of Bitcoin, the motivations for its creation, and the characteristics that make it so unique and innovative. Presenting how Bitcoin works should leave the reader with the necessary knowledge to dig deeper into the subject.
Originally, Bitcoin was simply yet another attempt to create an independent digital currency. In the 90s, cryptographers trying to do this came up against several obstacles:
The double-spending problem is being able to ensure that a digital currency is not spent more than once. It’s trivial with bills, but much more complicated online.
Then, if the quantity (supply) of money is not controlled, whoever issues a large quantity for his own benefit would totally devalue it (cf. the Mark crisis in the 1920s).
Finally, having a decentralized system is necessary to ensure that no entity can validate fraudulent transactions or take over control of the money supply.
The global financial crisis of 2007–2008 confirmed to Satoshi Nakamoto the need to create an electronic money, decentralized and independent from the current financial system. He therefore published Bitcoin’s white paper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Its publication solves the problems discussed above by taking advantage of several technologies already known at the time, such as asymmetric encryption, peer-to-peer networking, proof of work mining, and distributed ledger.
One of Satoshi Nakamoto’s great innovations with Bitcoin is the adjustment of new bitcoins’ creation, which adapts to take place about every ten minutes, no matter what (it’s actually an adjustment of the problem’s difficulty that miners need to solve in order to create those bitcoins, which we discuss a little below). This solves the problem of money creation control mentioned above, with an issuance which is non-modifiable, planned in advance, and known to all.
In addition, this creation is divided by two every four years, a phenomenon called halving. Over the years, the issuance of new bitcoins will become almost zero, with the total amount of bitcoins increasing up to around 21 million. Bitcoin is therefore characterized by an immutable monetary policy, decreasing inflation, and a limited total quantity.