An essential characteristic of the Bitcoin protocol is the strict limit on the number of bitcoins that can be created: it is stipulated that no more than 21 million bitcoins can ever be created.
Unfortunately, history shows that many financial projects start with the best intentions in the world, including promises of strict budget, and end a few years later with uncontrollable mismanagement, most often resulting in costly crises for companies and countries affected, or even for the entire world economy.
Why would the Bitcoin be insensitive to these failures? Despite the fact that it is a computer protocol, humans control it and make it evolve. So how could we guarantee that it is almost impossible to exceed the famous limit of 21 million bitcoins?
Why 21 million bitcoins?
The Bitcoin protocol provides for the creation of a predetermined number of bitcoins when each block of transactions is created, with a halving every four years: 50 bitcoins in 2009, 25 in 2013, 12.5 in 2016, and so on, until a total of 21 million in 2140. The idea behind this algorithm is to create an asset that has an intrinsic rarity, similar to precious metals, and that it is becoming increasingly difficult to’extract’ it” until reaching this absolute limit.
If the perception of this scarcity increases over time, it could increase the demand for Bitcoin and therefore its price. Buying Bitcoin in the first years of its creation can therefore be a good investment. Our Coinhouse platform provides a secure way to buy and store your bitcoins.
Who controls the Bitcoin protocol code?
Bitcoin’s computer code is controlled by about 100 computer scientists. They were chosen by cooptation, following the evolution proposals they were able to propose, in the same way as many other projects in the Free Software world, such as the Linux operating system.
These computer scientists have the possibility to modify the source code of the protocol, and to publish new versions. Nothing would, in theory, prevent them from producing a new version of the protocol with a much higher limit. The modification would be relatively simple to implement, and mechanisms of corruption, threats, or simple malicious intent could be implemented to make this change.
Who really decides on the evolution of the Bitcoin protocol?
Nevertheless, the only action that source code managers can take is to release new versions of the protocol. It still need to be deployed. As a reminder, the Bitcoin network consists of about ten thousand machines spread around the world, called nodes. Anyone can install a node at home by downloading the Bitcoin Core program.
As soon as a new version of the protocol is released, each node owner has the option to download and install it, or not to do so. In fact, if a new version of the protocol were published, allowing to exceed 21 million bitcoins, it is very unlikely that node owners would install it, since this would result in a dilution of their assets.
It is the owners of the nodes who decide the operating rules of the Bitcoin network by choosing whether or not to install the new versions of the protocol proposed by the computer code managers.
So the Bitcoin network works on a consensus system: if more than 90% of node owners install a new version, it is considered as a consensus and this version is then the real one.
What happens if consensus is not reached?
In the case where node owners do not find a consensus, i.e. a significant part of the nodes is updated with a version of the protocol while the other nodes keep the old version, a ”hard fork” happens: we now have two distinct and incompatible networks, with different operating rules, but sharing the same history until the moment of their separation.
In any case, the Bitcoin network continues to operate: either by consensus on a given version, or by separation from a part of the community that will prefer to operate on a different version of the protocol. It is therefore extremely unlikely that the 21 million bitcoin limit could ever be exceeded, and it is through this mechanism that the stability and security of the Bitcoin network is ensured.