Why Bitcoin?

Bitcoin is often described as an electronic currency. It is not a wrong statement, but that is not its specificity and why it’s been created. The truth is the vast majority of the money we use in our everyday lives already is de-materialized. Around early 2021, approximately $40T of dollars were in circulation, but only $2.04T of them were in the form of notes and coins. The remaining 95% are just lines in bank and institution databases.

This appears to be quite handy, as wiring millions from one bank to another does not require the hassle of sending stagecoaches crossing the countryside for days anymore, with all the logistic we can imagine and the multiple security issues that come with it. However, it implies a few difficulties.

The first one relates to security. Account balances and transactions being stored in the form of ledgers and managed by centralized entity systems, what if a bank database server gets erased or compromised? How do we recover from it? Financial institutions obviously took security measures to avoid or assess those possible issues, but some risk may persist.

The second one relates to trust. Having coins and notes in your vault makes your quite confident they won’t evaporate during the night. If your wealth is de-materialized in a database you can’t access to though, how do you ensure the central entity managing it does not manipulate numbers to steal from you or create value out of thin air? Also, when you pay groceries with cash, you exchange value through a physical medium that can’t be duplicated. If the baker grabs your coins to shove it in his pocket while handing you a baguette, the chances you still have those coins while leaving the store with the baguette under your arm are 0. Basic physics here: coins can’t duplicate and therefore can’t be spent two times simultaneously. This double-spending problem is however technically possible with de-materialized currencies and requires central authorities control and trust to prevent it.

The question of efficiency could also be brought. Let’s imagine a simple situation where a user A sends some euros from France to a user B in Sweden. A must inform the French bank which proceeds to debit the account and sends the money to the Central European Bank which then forwards it to the Swedish banks that finally credits B’s banking account. Having multiple middlemen wiring your transaction obviously drastically increases the risks of error or security issue, while being costly both in time and fees.

In addition, all those intermediaries appear to be a serious flaw when it comes to liberty and reliability matters, as having multiple central entities cooperating makes the whole financial system subject to political and diplomatic uncertainties. Money always being the first vector of bargain or sanction when conflicts occur, self-sovereignty and censorship resistance of money transfers can’t be completely guaranteed.

Lastly, no one could object that our current system seriously lacks two important features that any of us could be in the right to require, as an individuality or at a more global scale: transparency and privacy — although they may seem antinomic, they’re not. The facts are, today, you can’t hide to your bank what you do with your founds, while money laundering and tax evasion are still operated at worldwide scale.

Our traditional financial system therefore works, but it is far from optimum. It appears some better solutions could be found.

With the growth of internet and the development of sciences such as cryptography, lots of researches and experiences were conducted with the idea to get as close as possible from the “perfect” financial system. Such a system would ideally combine, among others, the following properties:

In 2008, an unknown person — or a group of people — using the pseudonym Satoshi Nakamoto published a 9-page long whitepaper laying the foundations of a peer-to-peer electronic cash system, soon followed in 2009 by the software allowing to operate it. What soon appears to be a major breakthrough was lead possible using a decentralized network of entities communicating through an open-source protocol. The main security and reliability issues were assessed using a distributed ledger called a Blockchain, asymmetric cryptography ciphering, and a powerful hash-based consensus mechanism relying on the proof of work principle.

Bitcoin was born, dusting off the financial system we knew so far, and opening the path to a decade of innovation around blockchains and cryptocurrencies. At the time, most had no idea that Bitcoin would be the sparkle setting fire to a whole new ecosystem aiming to reshape almost all aspects of your modern societies.

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