How does the Bitcoin work?

The total number of bitcoins was set at 21 million. This number is recorded in the protocol itself, and the monetary creation in the Bitcoin world is governed by an algorithm which increases the number of bitcoins in a regular and orderly manner. This process, by analogy with the precious metals with which the Bitcoin shares a significant number of similarities, is called mining. Bitcoins are exchanged on public platforms, with mechanisms close to the trading rooms. Supply and demand solely determine the price of the Bitcoin.

A Bitcoin e-wallet is in fact only a means of storing crypto-graphic keys enabling electronic signatures to be made. As with technologies like PGP, SSH, or HTTPS, this mechanism relies on the ability for a user to generate a transaction and apply a unique digital signature to it, which is petty to verify validity but nobody can reproduce or modify. This ensures optimum security for Bitcoin exchanges: unlike a payment in credit card for example, once the transaction is sent, it is impossible to modify it or to retrieve the information provided to generate another one.

Anyone can check the Bitcoin source code and detect errors or flaws. In this, the community collectively secures the protocol as a whole. If problems are found, they are processed quickly and efficiently, and not left without solution. Any programmer can also propose modifications or evolution of the protocol. They are then discussed publicly, and potentially accepted by consensus.

A simple mean of payment

Paying in Bitcoin means sending a sum from a Bitcoin address to another address. The easiest way to use Bitcoin is to use a digital wallet, which will allow you to send and receive payments. These wallets do almost everything: create your Bitcoin address, manage your account, track your transactions. As simple as a mail.

  • To receive bitcoins, you simply need to communicate your address to the payer, who will pay the bitcoins on it
  • To send bitcoins, you simply write down (or scan) the address to pay and pay the bitcoins on it.

The correspondent receives the funds immediately, and a confirmation of the network then permanently approves the transaction in the Bitcoin database.

Caution: Once a Bitcoin transaction has been completed, it cannot be canceled.

Benefits of Bitcoin

The Bitcoin is both a currency and a payment system, and the most innovative way of exchanging money at little cost.

Bitcoin is an international digital currency, enabling you to pay for purchases anywhere in the world, instantly and almost without charge, without going through a bank, without giving details of your credit card. It is an extremely reliable currency, used by millions of people.

The Bitcoin is also a new decentralized management system for the exchange of securities, in other words a monetary system without a bank and yet very reliable. At a time when more and more alternative payment services are emerging, the Bitcoin protocol has some characteristics that make it unique, even in the face of modern, fast and secure means of payment.

Fast, economic, and limitless: payments are made in seconds, between neighbors or from one end to the other of the connected world.

Decentralized and controlled: Bitcoin does not belong to anything or anyone, it is a common tool, as is the Internet, which is managed collectively by its users. The money supply of bitcoins is strictly framed, avoiding hyperinflation and other abuse of monetary creation.

Secure and transparent: as soon as it is sent, your payment is unforgeable. All Bitcoin transactions are stored in a public database, the block-chain, whose data and code can be consulted by everyone.

Receiving bitcoins

In the world of Bitcoin, the notion of direct debit does not exist, there are only transfers. In order to receive a transfer – a transaction – a user must provide his public address to the correspondent who wishes to send him bitcoins. This public key is the alphanumeric address that identifies your account.

The public address can also be represented by a QR code that can be easily scanned by a smartphone or webcam.

The communication of a public address does not arise a security problem: all that a user can do is send bitcoins to the person who has the address, and in no case to debit them. So, you can put your public address in an email or on a website in total security.

The user’s wallet generates the public address. Most modern wallets deliver a new address for each transaction, to guarantee the privacy of the users.

Sending bitcoins

Conversely, to send bitcoins, a user will have to ask his public address to the person who must receive the funds. Once this is obtained, he can set a transaction from his electronic wallet for the amount of his choice.

Warning: Once sent, a Bitcoin transaction cannot be canceled by any means whatsoever.

The correspondent receives the funds immediately, and a confirmation of the network Bitcoin takes place after about ten minutes, which “set in stone” the transaction in the database Bitcoin.

Who accepts bitcoins?

Online merchant sites

Today, more than 100,000 e-commerce sites around the world accept Bitcoin. In the United States, DELL, Overstock and Newegg are the best-known players in this market.

By paying by bitcoins on a site, you take no risk of hacking and never expose your private information such as the number of your credit card.

Physical stores

A growing number of physical stores accept payment in bitcoins, such as restaurants, clothing stores, or dentists. A global map of physical stores accepting Bitcoin is available at coinmap.org.

Crowdfunding, micro-payments, donations

NGOs like the Red Cross or Greenpeace are now accepting donations in Bitcoins, even for very small amounts. Websites can give tips to reward an interesting article or comment.

New services are being developed, particularly made possible by the extremely low level of commissions compared to other means of payment. Each Bitcoin transaction requires payment of a commission of less than one cent.

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Decentralization

To say that the Bitcoin is decentralized means that no company, state, or organization controls it. Just like e-mail or the web, it’s only a technology that anyone can use.

This involves in particular that it will never be possible to modify the conditions of use, since no company controls it. The only way to modify the Bitcoin protocol is to build consensus among the user community, which will only accept changes that improve the protocol.

Because the system is decentralized, it is impossible to attack any point to destroy it. The database containing all the Bitcoin transactions exists in tens of thousands of copies spread throughout the world.

The Block-chain

As soon as they are generated, Bitcoins transactions are stored on a distributed database, of which there are thousands of copies worldwide. The replication of a transaction on all the nodes of this network takes only a few seconds.

This ensures an extremely strong Bitcoin resilience: it is not possible to attack the system at any point to destroy it. The only way to prevent the use of the Bitcoin in an economic space is the setting up of a giant firewall around this space.

In addition to storage, Block-chain also ensures the tamper-proof nature of all Bitcoin transactions, notably verifying the crypto-graphic signatures of each transaction, and preventing a person from spending twice the same funds.

The Mining

The mechanism of monetary creation of the Bitcoin is its most complex part. Different actors, individuals or professionals, have computers dedicated to the validation of Bitcoin network transactions.

The transactions that have just appeared on the Bitcoin network are said to be “waiting for confirmation”. Every 10 minutes on average, by a random process, one of the machines dedicated to mining succeeds in generating a crypto-graphic fingerprint allowing to validate all the pending transactions. This mechanism is called a “confirmation”, and any transaction that has received at least one confirmation is considered immutable and permanently recorded in the block-chain.

Beyond its use as a simple and secure means of payment, its economic properties can make the Bitcoin a permanent means of saving and independent of any inflationary mechanism, unlike the current fiduciary currencies such as the euro or the dollar.