Bitcoin: Under the Hood

What is Bitcoin?

Bitcoin is a **cryptocurrency** launched in 2009: the first successful application of a technology called **blockchain**, enabling secure peer-to-peer transactions without a trusted intermediary. It is simultaneously an open-source protocol, a currency with a capped supply of 21 million units, and an experiment in monetary sovereignty.

🎯 The fundamental problem it solves: the **double-spend**. Before Bitcoin, sending a digital file meant copying it — so the same money could be spent twice. Satoshi showed how to prevent illicit copying without a central authority, using cryptography and a decentralised network.

Imagine a digital banknote that you can send like an email, but that cannot be copied or forged. That is Bitcoin.

📜 Genesis: The Satoshi Nakamoto Mystery

On 31 October 2008, an unknown person under the pseudonym **Satoshi Nakamoto** published a 9-page scientific paper: "Bitcoin: A Peer-to-Peer Electronic Cash System." On 3 January 2009, he mined the very first block, the **Genesis Block**, containing a message carved into the chain forever:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

This reference to the UK bank bailout was not incidental — it highlighted the political motivation behind Bitcoin: an alternative to centralised finance. Nakamoto gradually disappeared after December 2010, leaving behind roughly **1 million bitcoins** and code that still runs flawlessly more than 15 years later.

🔐 Cryptography and the UTXO Model

The art of signatures and chains of ownership

Bitcoin uses elliptic curve cryptography (secp256k1). Your wallet generates a **private key** (a random 256-bit number) and derives a **public key**, which in turn produces an **address** (starting with 1, 3, or bc1). The private key signs your transactions; the public key allows anyone to verify the signature without ever exposing the private key.

🔑 Private key = absolute control. Whoever holds it can move your bitcoins. There is no recovery mechanism — no "forgot password" in Bitcoin.

The UTXO model: destruction and recreation

Why bitcoins don't "move" — they are destroyed and recreated

Bitcoin does not store a "balance" in a database. It uses the UTXO model Unspent Transaction Output: think of physical banknotes of different denominations. A transaction takes your notes (inputs), tears them up, and creates brand-new notes (outputs) for the recipient and for you as change.

💡 Example: You hold two "banknotes": 0.001 BTC (address #47) and 0.05 BTC (address #127). You send 0.03 BTC to Bob. Notes #47 and #127 are DESTROYED. Two new notes are created: 0.03 BTC to Bob, and 0.0209 BTC to your new address #289 (change) — 0.0001 BTC goes to the miner as fees. Your wallet now shows: #289 = 0.0209 BTC. The old notes are empty forever.

This model guarantees no floating balance, prevents double-spending, and gives every bitcoin a unique, traceable history.

🏦 How a Wallet Manages Your Addresses

BIP32 magic: one seed, an infinity of addresses

Your wallet does not store your addresses — it **rebuilds** them at every startup from your 12 or 24 words (the seed). The BIP32 standard lets you derive every possible address:

🔑 How it works: 12 words → BIP39 → BIP32 → All your addresses m/44'/0'/0'/0/0 ← address #1 m/44'/0'/0'/0/47 ← address #48 ... ∞ On each startup, the wallet sequentially rescans its addresses (#0 through #1000…) to find funds.

This is absolute power: 12 words = eternal control over all your addresses. Lose the seed = permanent loss. Bitcoins never leave the blockchain — your seed is the mathematical proof of ownership.

⚠️ Seed loss = permanent loss. No authority can recover your bitcoins. This is the power AND the responsibility of Bitcoin.

Why you should NEVER reuse an address

Technically possible, strategically disastrous

After spending the funds of an address, it remains technically valid — you can still receive on it. But it is a serious privacy mistake.

🕵️ Privacy: BAD practice (reuse): Address #47 → received from Alice → received from Bob → sent to Carol ↓ Your entire financial history is visible and linkable. GOOD practice (new address every time): Address #47 → Alice → destroyed Address #289 → Bob → destroyed Address #1001 → Carol ↓ Impossible to link together.

Good wallets generate a new address automatically at each receipt. Don't force them to reuse.

Address formats: Legacy, SegWit, Bech32

Bitcoin uses several address formats: P2PKH (starting with 1, legacy), P2SH and Bech32 (starting with bc1, SegWit) offering lower fees and protection against dust attacks. The choice depends on your wallet and your privacy requirements.

Types of wallets

⛏️ Mining and Proof of Work

Why nodes trust the "longest chain"

Bitcoin's consensus is not a democratic vote. It is a vote by computing power: **Proof of Work**. Miners compete to solve a complex mathematical problem — the one who finds the correct nonce adds the next block and receives the reward. This mechanism is the heart of Bitcoin's security and the solution to the Byzantine Generals Problem.

The Role of Full Nodes

A full node downloads the entire blockchain (>500 GB) and validates every transaction since the genesis block. If miners ever change the rules (e.g. create more than 21 million BTC), your node rejects their blocks. That is ultimate sovereignty — miners do not make the rules, they execute them.

Adjustable Difficulty and Halving

The predictable pace of issuance

The protocol automatically adjusts mining difficulty every 2,016 blocks (~2 weeks) to maintain an average interval of **10 minutes** between blocks. More miners = difficulty rises; fewer miners = difficulty drops.

📉 Halving (every ~4 years): 2009: 50 BTC per block 2012: 25 BTC 2016: 12.5 BTC 2020: 6.25 BTC April 2024: 3.125 BTC ← latest halving ... until ~21 million in 2140.

Over time, the block reward diminishes and **transaction fees** will progressively become the miners' main incentive.

⚠️ The 51% attack: If a single entity controls more than half of the hashrate, it can reorganise recent history. Forums like Bitcointalk constantly debate mining-pool decentralisation.

🔄 Transactions: from mempool to confirmation

When is a transaction irreversible?

When Alice sends bitcoins to Bob, the transaction passes through several stages: creation with signature → propagation to the network → waiting in the **mempool** (waiting area) → selection by a miner → inclusion in a block → confirmation.

✅ Confirmation levels: 6 confirmations (6 blocks above) → maximum security (modifying these blocks would require astronomical computing power) 1 confirmation → sufficient for moderate amounts 0 confirmation → accepted by some merchants for small sums (theoretical double-spend risk)

Each block added represents an additional layer of security. It is mathematical inertia that makes Bitcoin unbreakable — not trust in any entity.

⚠️ The Danger of Quantum Computing

Should you really be afraid?

Quantum computers, via Shor's algorithm, could factor large numbers and break ECDSA. This would mean deriving the private key from a public key visible on the blockchain.

🛡️ Technical response: 1. P2PKH (address starting with 1): hides the public key behind SHA-256/RIPEMD-160. Cracking the hash is infinitely more complex than cracking the signature. 2. SegWit (bc1): vulnerable only if the transaction has already been signed and made public. 3. The community is working on SPHINCS+ (post-quantum signatures), but this increases transaction size.

Urgency: not imminent — millions of stable qubits would be needed vs a few hundred today. But the threat is taken seriously.

🚧 Scalability: The Great Battle

Why Bitcoin doesn't do 1 million TPS

The scalability debate is as old as the project. From Satoshi's very first post, user James McDonald replied: "We very, very much need such a system, but the way I understand your proposal, it does not seem to scale to the required size." Satoshi set a 1 MB block limit to allow home nodes to operate.

The faction war (2017)

Big Blockers (big blocks → Bitcoin Cash) vs Small Blockers (layer-2 → Lightning Network). Small Blockers won.

Lightning Network: the miracle and its limits

Elegant principle: Alice and Bob open a payment channel by locking BTC on the main chain. Instant, feeless transfers thereafter. The final state is only written to the blockchain when the channel closes.

⚡ Security: "timelocks" and penalties. If Bob cheats (closes with an old state), Alice can claim ALL channel funds — the "Justice Transaction" mechanism.

Despite this brilliance, criticism persists. Jeff Garzik: "Lightning is a failure... Capital has already voted." Source BTCC.

The Lightning crisis (2024–2025)

In a high-fee environment, opening/closing a Lightning channel becomes prohibitively expensive. Public capacity stagnates around 4,000–5,000 BTC, while WBTC on Ethereum exceeds 130,000 BTC CoinShares 2025.

Another major criticism: a Lightning node must stay constantly online. Paul Sztorc (LayerTwo Labs): most Lightning users are actually "custodial" — they don't truly hold their channel keys, turning Bitcoin into a disguised bank.

Future: "Channel Factories" or "Sidechains" — but the trust problem remains.

💡 Advantages and Innovations of Bitcoin

Bitcoin enables international transfers 24/7, with no intermediary. Fees can be much lower than bank wires, especially for large amounts. Revolutionary for **migrant workers** sending money home.

**Total transparency**: all transactions are public and verifiable by anyone. It is impossible to create BTC out of thin air or forge transactions.

Legitimate criticisms

⚡ Energy consumption: Proof of Work requires significant computational power. Supporters note Bitcoin increasingly uses renewable energy and that the traditional financial system also consumes enormous amounts (data centres, branches, cash transport). A fair comparison must cover the whole system.

📈 Volatility: Prices have seen spectacular swings. Supporters respond that volatility decreases with market maturity and institutional adoption — just as stocks went through their own volatile periods.

For the general public, Bitcoin remains complex to use: managing private keys, understanding fees, protecting against loss/theft. The ecosystem is constantly evolving (HD wallets, simplified interfaces) to make Bitcoin more accessible.

📜 The Regulatory Landscape: MiCA and Spot ETFs

Bitcoin enters the institutional fold

2024–2025 mark a turning point: Bitcoin is entering the realm of traditional finance.

Spot Bitcoin ETFs (January 2024)

The SEC approved the first spot Bitcoin ETFs, opening the door to mass institutional investment. BlackRock, Fidelity, ARK Invest now manage billions in BTC. By 2025, ETF inflows exceeded annual BTC emissions.

⚠️ Paradox: ETFs centralise BTC holdings. BlackRock alone holds >1% of the total 21 million supply, raising questions about who the "real" holders are.

MiCA Regulation in Europe (2024)

The Markets in Crypto-Assets regulation, effective June 2024, is the first comprehensive regulatory framework for crypto-assets in the EU.

🇪🇺 What MiCA changes: - Exchanges must obtain authorisation in each member state. - Stablecoins must maintain audited 1:1 reserves. - Service providers must inform clients of risks. - National regulators (AMF in France) gain enhanced enforcement powers.

In France, the AMF and ACPR constantly highlight the risky nature of crypto-assets. Bitcoin is not legal tender — it is a speculative asset whose value depends on market confidence.

🧠 Synthesis: The Blockchain Trilemma

Bitcoin chose **Security** and **Decentralisation** at the base layer, sacrificing **Scalability**. Layer-2 solutions (Lightning, RGB, etc.) attempt to regain scalability without sacrificing the other two. The technical debate today is no longer "Satoshi vs the rest" but "How do we stack trust layers without recreating traditional finance?"

📚 Sources and References