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((("bitcoin","implementation of", id="ix_ch02-asciidoc0", range="startofrange")))The bitcoin system, unlike traditional banking and payment systems, is based on de-centralized trust. Instead of a central trusted authority, in bitcoin, trust is achieved as an emergent property from the interactions of different participants in the bitcoin system. In this chapter, we will examine bitcoin from a high level by tracking a single transaction through the bitcoin system and watch as it becomes "trusted" and accepted by the bitcoin mechanism of distributed consensus and is finally recorded on the blockchain, the distributed ledger of all transactions.
Each example is based on an actual transaction made on the bitcoin network, simulating the interactions between the users (Joe, Alice, and Bob) by sending funds from one wallet to another. While tracking a transaction through the bitcoin network and blockchain, we will use a((("blockchain explorer websites"))) _blockchain explorer_ site to visualize each step. A blockchain explorer is a web application that operates as a bitcoin search engine, in that it allows you to search for addresses, transactions, and blocks and see the relationships and flows between them.
Each example is based on an actual transaction made on the bitcoin network, simulating the interactions between the users (Joe, Alice, Bob and Gopesh) by sending funds from one wallet to another. While tracking a transaction through the bitcoin network and blockchain, we will use a((("blockchain explorer websites"))) _blockchain explorer_ site to visualize each step. A blockchain explorer is a web application that operates as a bitcoin search engine, in that it allows you to search for addresses, transactions, and blocks and see the relationships and flows between them.
Popular blockchain explorers include: ((("blockchain.info website")))((("blockexplorer.com")))((("blockr.io website")))((("insight.bitpay.com")))
@ -14,12 +14,11 @@ Popular blockchain explorers include: ((("blockchain.info website")))((("blockex
* http://insight.bitpay.com[insight]
* http://blockr.io[blockr Block Reader]
Each of these has a search function that can take an address, transaction hash, or block number and find the equivalent data on the bitcoin network and blockchain. With each example, we will provide a URL that takes you directly to the relevant entry, so you can study it in detail.
Each of these has a search function that can take an address, transaction hash, block number, or block hash and find the equivalent data on the bitcoin network and blockchain. With each example, we will provide a URL that takes you directly to the relevant entry, so you can study it in detail.
==== Bitcoin Overview
In the overview diagram shown in <<bitcoin-overview>>, we see that 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. In this chapter, we will trace a single transaction as it travels across the network and examine the interactions between each part of the bitcoin system, at a high level. Subsequent chapters will delve into the technology behind wallets, mining, and merchant systems.
In the overview diagram shown in <<bitcoin-overview>>, we see that 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. In this chapter, we will trace a single transaction as it travels across the network and examine the interactions between each part of the bitcoin system, at a high level. Subsequent chapters will delve into the technology behind transactions, the network, and mining.
[[bitcoin-overview]]
.Bitcoin overview
@ -28,7 +27,7 @@ image::images/msbt_0201.png["Bitcoin Overview"]
[[cup_of_coffee]]
==== Buying a Cup of Coffee
((("transactions", id="ix_ch02-asciidoc1", range="startofrange")))((("transactions","simple example of", id="ix_ch02-asciidoc2", range="startofrange")))Alice, introduced in the previous chapter, is a new user who has just acquired her first bitcoin. In <<getting_first_bitcoin>>, Alice met with her friend Joe to exchange some cash for bitcoin. The transaction created by Joe funded Alice's wallet with 0.10 BTC. Now Alice will make her first retail transaction, buying a cup of coffee at Bob's coffee shop in Palo Alto, California. Bob's coffee shop recently started accepting bitcoin payments, by adding a bitcoin option to his point-of-sale system. The prices at Bob's Cafe are listed in the local currency (US dollars), but at the register, customers have the option of paying in either dollars or bitcoin. Alice places her order for a cup of coffee and Bob enters the transaction at the register. The point-of-sale system will convert the total price from US dollars to bitcoins at the prevailing market rate and display the prices in both currencies, as well as show a QR code containing a _payment request_ for this transaction (see <<payment-request-QR>>):
((("transactions", id="ix_ch02-asciidoc1", range="startofrange")))((("transactions","simple example of", id="ix_ch02-asciidoc2", range="startofrange")))Alice, introduced in the previous chapter, is a new user who has just acquired her first bitcoin. In <<getting_first_bitcoin>>, Alice met with her friend Joe to exchange some cash for bitcoin. The transaction created by Joe funded Alice's wallet with 0.10 BTC. Now Alice will make her first retail transaction, buying a cup of coffee at Bob's coffee shop in Palo Alto, California. Bob's Cafe recently started accepting bitcoin payments, by adding a bitcoin option to their point-of-sale system. The prices at Bob's Cafe are listed in the local currency (US dollars), but at the register, customers have the option of paying in either dollars or bitcoin. Alice places her order for a cup of coffee and Bob enters the transaction at the register. The point-of-sale system will convert the total price from US dollars to bitcoin at the prevailing market rate and display the prices in both currencies, as well as show a QR code containing a _payment request_ for this transaction (see <<payment-request-QR>>):
----
Total:
@ -37,7 +36,7 @@ $1.50 USD
----
[[payment-request-QR]]
.Payment request QR code (Hint: Try to scan this!)
.Payment request QR code (Hint: Try to scan this with your wallet!)
image::images/msbt_0202.png["payment-request"]
[[payment-request-URL]]
@ -59,7 +58,7 @@ A description for the payment: "Purchase at Bob's Cafe"
[TIP]
====
((("QR codes","payment requests as")))Unlike a QR code that simply contains a destination bitcoin address, a payment request is a QR-encoded URL that contains a destination address, a payment amount, and a generic description such as "Bob's Cafe." This allows a bitcoin wallet application to prefill the information used to send the payment while showing a human-readable description to the user. You can scan the QR code with a bitcoin wallet application to see what Alice would see.
((("QR codes","payment requests as")))Unlike a QR code that simply contains a destination bitcoin address, a payment request is a QR-encoded URL that contains a destination address, a payment amount, and a generic description such as "Bob's Cafe." This allows a bitcoin wallet application to pre-fill the information used to send the payment while showing a human-readable description to the user. You can scan the QR code with a bitcoin wallet application to see what Alice would see.
====
Bob says, "That's one-dollar-fifty, or fifteen millibits."
@ -70,22 +69,23 @@ In the following sections we will examine this transaction in more detail, see h
[NOTE]
====
The bitcoin network can transact in fractional values, e.g., from milli-bitcoins (1/1000th of a bitcoin) down to 1/100,000,000th of a bitcoin, which is known as a((("satoshis","defined"))) satoshi. Throughout this book we’ll use the term “bitcoin” to refer to any quantity of bitcoin currency, from the smallest unit (1 satoshi) to the total number (21,000,000) of all bitcoins that will ever be mined.(((range="endofrange", startref="ix_ch02-asciidoc2")))
The bitcoin network can transact in fractional values, e.g., from milli-bitcoins (1/1000th of a bitcoin) down to 1/100,000,000th of a bitcoin, which is known as a((("satoshis","defined"))) satoshi. Throughout this book we’ll use the term “bitcoin” to refer to any quantity of bitcoin currency, from the smallest unit (1 satoshi) to the total number (21,000,000) of all bitcoin that will ever be mined.(((range="endofrange", startref="ix_ch02-asciidoc2")))
====
=== Bitcoin Transactions
((("transactions","defined")))In simple terms, a transaction tells the network that the owner of a number of bitcoins has authorized the transfer of some of those bitcoins to another owner. The new owner can now spend these bitcoins by creating another transaction that authorizes transfer to another owner, and so on, in a chain of ownership.
((("transactions","defined")))In simple terms, a transaction tells the network that the owner of some bitcoin value has authorized the transfer of some of that bitcoin value to another owner. The new owner can now spend the bitcoin by creating another transaction that authorizes transfer to another owner, and so on, in a chain of ownership.
Transactions are like lines in a double-entry bookkeeping ledger. ((("inputs, defined")))In simple terms, each transaction contains one or more "inputs," which are debits against a bitcoin account. ((("outputs, defined")))On the other side of the transaction, there are one or more "outputs," which are credits added to a bitcoin account. The inputs and outputs (debits and credits) do not necessarily add up to the same amount. Instead, outputs add up to slightly less than inputs and the difference represents an implied "transaction fee," which is a small payment collected by the miner who includes the transaction in the ledger. A bitcoin transaction is shown as a bookkeeping ledger entry in <<transaction-double-entry>>.
Transactions are like lines in a double-entry bookkeeping ledger. ((("inputs, defined")))In simple terms, each transaction contains one or more "inputs," which are like debits against a bitcoin account. ((("outputs, defined")))On the other side of the transaction, there are one or more "outputs," which are like credits added to a bitcoin account. The inputs and outputs (debits and credits) do not necessarily add up to the same amount. Instead, outputs add up to slightly less than inputs and the difference represents an implied _transaction fee_, which is a small payment collected by the miner who includes the transaction in the ledger. A bitcoin transaction is shown as a bookkeeping ledger entry in <<transaction-double-entry>>.
The transaction also contains proof of ownership for each amount of bitcoin (inputs) whose value is transferred, in the form of a digital signature from the owner, which can be independently validated by anyone. In bitcoin terms, "spending" is signing a transaction that transfers value from a previous transaction over to a new owner identified by a bitcoin address.
The transaction also contains proof of ownership for each amount of bitcoin (inputs) whose value is being spent, in the form of a digital signature from the owner, which can be independently validated by anyone. In bitcoin terms, "spending" is signing a transaction that transfers value from a previous transaction over to a new owner identified by a bitcoin address.
In summary, _transactions_ move value from _transaction inputs_ to _transaction outputs_. An input is where the coin value is coming from, that is, a previous transaction's output. A transaction output assigns a new owner to the value by associating it with a key. The destination key imposes a requirement for a signature for the funds to be redeemed in future transactions. 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 <<blockchain-mnemonic>>).
[TIP]
====
_Transactions_ move value from _transaction inputs_ to _transaction outputs_. An input is where the coin value is coming from, usually a previous transaction's output. A transaction output assigns a new owner to the value by associating it with a key. The destination key is called an _encumbrance_. It imposes a requirement for a signature for the funds to be redeemed in future transactions. 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 address to address (see <<blockchain-mnemonic>>).
Transaction inputs are always spent entirely and undivided. Like selecting coins or bills from a wallet, you can't spend only part of a transaction input. When making a payment that is less than the value of the input value, the transaction will create _change_ as an output that goes back to the sender. For example, if a 1 bitcoin input is used in a transaction attempting to pay a 0.1 bitcoin output to a recipient, an additional output of 0.9 bitcoin is created in an output paying the sender, thus making change. 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.
====
[[transaction-double-entry]]
@ -96,7 +96,7 @@ image::images/msbt_0203.png["Transaction Double-Entry"]
.A chain of transactions, where the output of one transaction is the input of the next transaction
image::images/msbt_0204.png["Transaction chain"]
Alice's payment to Bob's Cafe uses a previous transaction as its input. In the previous chapter Alice received bitcoin from her friend Joe in return for cash. That transaction has a number of bitcoins locked (encumbered) against Alice's key. Her new transaction to Bob's Cafe references the previous transaction as an input and creates new outputs to pay for the cup of coffee and receive change. The transactions form a chain, where the inputs from the latest transaction correspond to outputs from previous transactions. Alice's key provides the signature that unlocks those previous transaction outputs, thereby proving to the bitcoin network that she owns the funds. She attaches the payment for coffee to Bob's address, thereby "encumbering" that output with the requirement that Bob produces a signature in order to spend that amount. This represents a transfer of value between Alice and Bob. This chain of transactions, from Joe to Alice to Bob, is illustrated in <<blockchain-mnemonic>>.
Alice's payment to Bob's Cafe uses a previous transaction's output as its input. In the previous chapter Alice received bitcoin from her friend Joe in return for cash. That transaction created a bitcoin value locked by Alice's key. Her new transaction to Bob's Cafe references the previous transaction as an input and creates new outputs to pay for the cup of coffee and receive change. The transactions form a chain, where the inputs from the latest transaction correspond to outputs from previous transactions. Alice's key provides the signature that unlocks those previous transaction outputs, thereby proving to the bitcoin network that she owns the funds. She attaches the payment for coffee to Bob's address, thereby "encumbering" that output with the requirement that Bob produces a signature in order to spend that amount. This represents a transfer of value between Alice and Bob. This chain of transactions, from Joe to Alice to Bob, is illustrated in <<blockchain-mnemonic>>.
==== Common Transaction Forms
@ -124,7 +124,7 @@ image::images/msbt_0207.png["Distributing Transaction"]
==== Getting the Right Inputs
((("transactions","inputs, getting", id="ix_ch02-asciidoc5", range="startofrange")))Alice's wallet application will first have to find inputs that can pay for the amount she wants to send to Bob. Most wallet applications keep a small database of "unspent transaction outputs" that are locked (encumbered) with the wallet's own keys. Therefore, Alice's wallet would contain a copy of the transaction output from Joe's transaction, which was created in exchange for cash (see <<getting_first_bitcoin>>). A bitcoin wallet application that runs as a full-index client actually contains a copy of every unspent output from every transaction in the blockchain. This allows a wallet to construct transaction inputs as well as quickly verify incoming transactions as having correct inputs. However, because a full-index client takes up a lot of disk space, most user wallets run "lightweight" clients that track only the user's own unspent outputs.
((("transactions","inputs, getting", id="ix_ch02-asciidoc5", range="startofrange")))Alice's wallet application will first have to find inputs that can pay for the amount she wants to send to Bob. Most wallet applications keep a small database of "unspent transaction outputs" that are locked with the wallet's own keys. Therefore, Alice's wallet would contain a copy of the transaction output from Joe's transaction, which was created in exchange for cash (see <<getting_first_bitcoin>>). A bitcoin wallet application that runs as a full-index client actually contains a copy of every unspent output from every transaction in the blockchain. This allows a wallet to construct transaction inputs as well as quickly verify incoming transactions as having correct inputs. However, because a full-index client takes up a lot of disk space, most user wallets run "lightweight" clients that track only the user's own unspent outputs.
((("wallets","blockchain storage in")))If the wallet application does not maintain a copy of unspent transaction outputs, it can query the bitcoin network to retrieve this information, using a variety of APIs available by different providers or by asking a full-index node using the bitcoin JSON RPC API. <<example_2-1>> shows a RESTful API request, constructed as an HTTP GET command to a specific URL. This URL will return all the unspent transaction outputs for an address, giving any application the information it needs to construct transaction inputs for spending. We use the simple command-line HTTP client((("cURL HTTP client"))) _cURL_ to retrieve the response.