Bitcoin consists of:
- A decentralized peer-to-peer network (the bitcoin protocol)
- A public transaction ledger (the blockchain)
- A set of rules for independent transaction validation and currency issuance (consensus rules)
- A mechanism for reaching global decentralized consensus on the valid blockchain (Proof-of-Work algorithm)
Bitcoin addresses start with a 1 or 3. Like email addresses, they can be shared with other bitcoin users who can use them to send bitcoin directly to your wallet. There is nothing sensitive, from a security perspective, about the bitcoin address. It can be posted anywhere without risking the security of the account. Unlike email addresses, you can create new addresses as often as you like, all of which will direct funds to your wallet
The bitcoin system consists of users with wallets containing keys, transactions that are propagated across the network, and miners who produce (through competitive computation) the consensus blockchain, which is the authoritative ledger of all transactions.
Many bitcoin transactions will include outputs that reference both an address of the new owner and an address of the current owner, called the change address. This is because transaction inputs, like currency notes, cannot be divided. If you purchase a $5 US dollar item in a store but use a $20 US dollar bill to pay for the item, you expect to receive $15 US dollars in change. The same concept applies to bitcoin transaction inputs. If you purchased an item that costs 5 bitcoin but only had a 20 bitcoin input to use, you would send one output of 5 bitcoin to the store owner and one output of 15 bitcoin back to yourself as change (less any applicable transaction fee). Importantly, the change address does not have to be the same address as that of the input and for privacy reasons is often a new address from the owner’s wallet
In summary, transactions move value from transaction inputs to transaction outputs. An input is a reference to a previous transaction’s output, showing where the value is coming from. A transaction output directs a specific value to a new owner’s bitcoin address and can include a change output back to the original owner. Outputs from one transaction can be used as inputs in a new transaction, thus creating a chain of ownership as the value is moved from owner to owner.
See here.
Alice’s transaction is now propagated on the bitcoin network. It does not become part of the blockchain until it is verified and included in a block by a process called mining.
The mining process serves two purposes in bitcoin:
- Mining nodes validate all transactions by reference to bitcoin’s consensus rules. Therefore, mining provides security for bitcoin transactions by rejecting invalid or malformed transactions.
- Mining creates new bitcoin in each block, almost like a central bank printing new money. The amount of bitcoin created per block is limited and diminishes with time, following a fixed issuance schedule.
Some commands I had to run to ./configure Bitcoin on my Ubuntu. I'm using this part of the book as a reference.
It is important to read the Unix Build Notes before.
- This one, to install autoconf, found here
sudo apt-get update
sudo apt-get install autoconf
- This one, found here
sudo apt-get install libdb++-dev
- This one, found here:
sudo apt-get install libboost-system-dev libboost-filesystem-dev libboost-chrono-dev libboost-program-options-dev libboost-test-dev libboost-thread-dev
A bitcoin address is a string of digits and characters that can be shared with anyone who wants to send you money. Addresses produced from public keys consist of a string of numbers and letters, beginning with the digit "1." Here’s an example of a bitcoin address:
1J7mdg5rbQyUHENYdx39WVWK7fsLpEoXZy
A bitcoin address is not the same as a public key. Bitcoin addresses are derived from a public key using a one-way function.
A common misconception about bitcoin is that bitcoin wallets contain bitcoin. In fact, the wallet contains only keys. The "coins" are recorded in the blockchain on the bitcoin network. Users control the coins on the network by signing transactions with the keys in their wallets. In a sense, a bitcoin wallet is a keychain.
Bitcoin wallets contain keys, not coins. Each user has a wallet containing keys. Wallets are really keychains containing pairs of private/public keys. Users sign transactions with the keys, thereby proving they own the transaction outputs (their coins). The coins are stored on the blockchain in the form of transaction outputs (often noted as vout or txout).
Transactions are the most important part of the bitcoin system. Everything else in bitcoin is designed to ensure that transactions can be created, propagated on the network, validated, and finally added to the global ledger of transactions (the blockchain). Transactions are data structures that encode the transfer of value between participants in the bitcoin system. Each transaction is a public entry in bitcoin’s blockchain, the global double-entry bookkeeping ledger.
The fundamental building block of a bitcoin transaction is a transaction output. Transaction outputs are indivisible chunks of bitcoin currency, recorded on the blockchain, and recognized as valid by the entire network. Bitcoin full nodes track all available and spendable outputs, known as unspent transaction outputs, or UTXO.
An unspent output can only be consumed in its entirety by a transaction. If an UTXO is larger than the desired value of a transaction, it must still be consumed in its entirety and change must be generated in the transaction. In other words, if you have an UTXO worth 20 bitcoin and want to pay only 1 bitcoin, your transaction must consume the entire 20-bitcoin UTXO and produce two outputs: one paying 1 bitcoin to your desired recipient and another paying 19 bitcoin in change back to your wallet. As a result of the indivisible nature of transaction outputs, most bitcoin transactions will have to generate change.
The exception to the output and input chain is a special type of transaction called the coinbase transaction, which is the first transaction in each block. This transaction is placed there by the "winning" miner and creates brand-new bitcoin payable to that miner as a reward for mining. This special coinbase transaction does not consume UTXO; instead, it has a special type of input called the "coinbase." This is how bitcoin’s money supply is created during the mining process. What comes first? Inputs or outputs, the chicken or the egg? Strictly speaking, outputs come first because coinbase transactions, which generate new bitcoin, have no inputs and create outputs from nothing.
Most transactions include transaction fees, which compensate the bitcoin miners for securing the network. Transaction fees are collected by the miner who mines the block that records the transaction on the blockchain. Transaction fees are implied, as the excess of inputs minus outputs:
Fees = Sum(Inputs) – Sum(Outputs)