Introduced in a whitepaper in 2009 under MIT open source credentials, bitcoin is a peer-to-peer electronic cash system. This digital currency is not attached to state or government and does not have a central issuing authority or regulatory body but can be exchanged between computers in a worldwide peer-to-peer network.
Currently there isn’t an organization who decides when to make more bitcoins or investigate fraud. The central authority is in this case replaced by a lot of people keeping track of the same thing to make sure all transactions are accurate thanks to a public ledger called blockchain.
An interdependent cryptographic hash function to secure the chain
The blockchain records every sequence of bitcoin transactions ever made in the network. To add a block of transactions to the chain, each person maintaining a ledger has to solve a math problem created by a cryptographic hash function (an algorithm that takes an input of any size, and turns it into an output with a fixed size). The fastest one that solves the problem adds the new block to the chain updating the blockchain everyone else has to synchronize to. As the hash function includes an identifier of the previous block, it is impossible to change a transaction in the past without having to recalculate all the identifiers of the previous blocks.
A new block is validated every 10 minutes. The capacity to defraud is linked to the computing power. You would need 50% of all the network computing power to calculate the falsified identifiers faster than the real ones.
Creating new bitcoins
Every time you win a race to add a block to the blockchain, bitcoins are created and awarded to your account. It is the only mechanism to create new bitcoins. As of March 20th 2017, one bitcoin is worth $1,046.54 US dollars .
An asymmetric cryptography to secure the transaction
Bitcoins are kept pretty safe thanks to asymmetric cryptography as the key to encrypt the message is not the same as the one to decrypt it: a private key for signing the message that nobody else can replicate and a public key to read the message.
The future of financial infrastructure
Bitcoin is still a cutting-edge experiment with potential, purpose and applications yet to be decided, e.g. electronic money, foundation for electronic shares or integration in mainstream finance. Beside bitcoin, according to a study by WEF ., the blockchain or distributed ledger technology (DLT) has the potential to reshape financial services: operational simplification, regulatory efficiency improvement, liquidity and capital improvement and fraud minimization.
Reference : figure from , WEF 2016