@ -175,9 +175,9 @@ As you can see, Alice's wallet contains enough bitcoins in a single unspent outp
((("transactions","outputs, creating")))A transaction output is created in the form of a script that creates an encumbrance on the value and can only be redeemed by the introduction of a solution to the script. In simpler terms, Alice's transaction output will contain a script that says something like, "This output is payable to whoever can present a signature from the key corresponding to Bob's public address." Because only Bob has the wallet with the keys corresponding to that address, only Bob's wallet can present such a signature to redeem this output. Alice will therefore "encumber" the output value with a demand for a signature from Bob.
This transaction will also include a second output, because Alice's funds are in the form of a 0.10 BTC output, too much money for the 0.015 BTC cup of coffee. Alice will need 0.085 BTC in change. Alice's change payment is created _by Alice's wallet_ in the very same transaction as the payment to Bob. Essentially, Alice's wallet breaks her funds into two payments: one to Bob, and one back to herself. She can then use the change output in a subsequent transaction, thus spending it later.
This transaction will also include a second output, because Alice's funds are in the form of a 0.10 BTC output, too much money for the 0.015 BTC cup of coffee. Alice will need 0.085 BTC in change. Alice's change payment is created by Alice's wallet as an output in the very same transaction as the payment to Bob. Essentially, Alice's wallet breaks her funds into two payments: one to Bob, and one back to herself. She can then use (spend) the change output in a subsequent transaction.
Finally, for the transaction to be processed by the network in a timely fashion, Alice's wallet application will add a small fee. This is not explicit in the transaction; it is implied by the difference between inputs and outputs. If instead of taking 0.085 in change, Alice creates only 0.0845 as the second output, there will be 0.0005 BTC (half a millibitcoin) left over. The input's 0.10 BTC is not fully spent with the two outputs, because they will add up to less than 0.10. The resulting difference is the _transaction fee_ that is collected by the miner as a fee for including the transaction in a block and putting it on the blockchain ledger.
Finally, for the transaction to be processed by the network in a timely fashion, Alice's wallet application will add a small fee. This is not explicit in the transaction; it is implied by the difference between inputs and outputs. If instead of taking 0.085 in change, Alice creates only 0.0845 as the second output, there will be 0.0005 BTC (half a millibitcoin) left over. The input's 0.10 BTC is not fully spent with the two outputs, because they will add up to less than 0.10. The resulting difference is the _transaction fee_ that is collected by the miner as a fee for validating and including the transaction in a block to be recorded on the blockchain.
The resulting transaction can be seen using a blockchain explorer web application, as shown in <<transaction-alice>>.
@ -193,21 +193,19 @@ View the http://bit.ly/1u0FIGs[transaction from Alice to Bob's Cafe].
==== Adding the Transaction to the Ledger
((("transactions","adding to ledger")))The transaction created by Alice's wallet application is 258 bytes long and contains everything necessary to confirm ownership of the funds and assign new owners. Now, the transaction must be transmitted to the bitcoin network where it will become part of the distributed ledger (the blockchain). In the next section we will see how a transaction becomes part of a new block and how the block is "mined." Finally, we will see how the new block, once added to the blockchain, is increasingly trusted by the network as more blocks are added.
((("transactions","adding to ledger")))The transaction created by Alice's wallet application is 258 bytes long and contains everything necessary to confirm ownership of the funds and assign new owners. Now, the transaction must be transmitted to the bitcoin network where it will become part of the blockchain. In the next section we will see how a transaction becomes part of a new block and how the block is "mined." Finally, we will see how the new block, once added to the blockchain, is increasingly trusted by the network as more blocks are added.
===== Transmitting the transaction
((("transactions","transmitting")))((("transmitting transactions")))Because the transaction contains all the information necessary to process, it does not matter how or where it is transmitted to the bitcoin network. The bitcoin network is a peer-to-peer network, with each bitcoin client participating by connecting to several other bitcoin clients. The purpose of the bitcoin network is to propagate transactions and blocks to all participants.
((("transactions","transmitting")))((("transmitting transactions")))Because the transaction contains all the information necessary to process, it does not matter how or where it is transmitted to the bitcoin network. The bitcoin network is a peer-to-peer network, with each bitcoin client participating by connecting to several other bitcoin clients. The purpose of the bitcoin network is to propagate transactions and blocks to all participants.
===== How it propagates
((("transactions","propagating")))Alice's wallet application can send the new transaction to any of the other bitcoin clients it is connected to over any Internet connection: wired, WiFi, or mobile. Her bitcoin wallet does not have to be connected to Bob's bitcoin wallet directly and she does not have to use the Internet connection offered by the cafe, though both those options are possible, too. Any bitcoin network node (other client) that receives a valid transaction it has not seen before will immediately forward it to other nodes to which it is connected. Thus, the transaction rapidly propagates out across the peer-to-peer network, reaching a large percentage of the nodes within a few seconds.
((("transactions","propagating")))Any system, such as a server, desktop application, or wallet, that participates in the bitcoin network by "speaking" the bitcoin protocol is called a ((("bitcoin", "node")))_bitcoin node_. Alice's wallet application can send the new transaction to any bitcoin node it is connected to over any type of connection: wired, WiFi, mobile etc. Her bitcoin wallet does not have to be connected to Bob's bitcoin wallet directly and she does not have to use the Internet connection offered by the cafe, though both those options are possible, too. Any bitcoin node that receives a valid transaction it has not seen before will immediately forward it to all other nodes to which it is connected, a propagation technique known as _flooding_. Thus, the transaction rapidly propagates out across the peer-to-peer network, reaching a large percentage of the nodes within a few seconds.
===== Bob's view
If Bob's bitcoin wallet application is directly connected to Alice's wallet application, Bob's wallet application might be the first node to receive the transaction. However, even if Alice's wallet sends the transaction through other nodes, it will reach Bob's wallet within a few seconds. Bob's wallet will immediately identify Alice's transaction as an incoming payment because it contains outputs redeemable by Bob's keys. Bob's wallet application can also independently verify that the transaction is well formed, uses previously unspent inputs, and contains sufficient transaction fees to be included in the next block. At this point Bob can assume, with little risk, that the transaction will shortly be included in a block and confirmed.
If Bob's bitcoin wallet application is directly connected to Alice's wallet application, Bob's wallet application might be the first node to receive the transaction. However, even if Alice's wallet sends the transaction through other nodes, it will reach Bob's wallet within a few seconds. Bob's wallet will immediately identify Alice's transaction as an incoming payment because it contains outputs redeemable by Bob's keys. Bob's wallet application can also independently verify that the transaction is well formed, uses previously unspent inputs, and contains sufficient transaction fees to be included in the next block. At this point Bob can assume, with little risk, that the transaction will shortly be included in a block and confirmed.
[TIP]
====
@ -216,30 +214,33 @@ If Bob's bitcoin wallet application is directly connected to Alice's wallet appl
=== Bitcoin Mining
((("mining","blockchains")))The transaction is now propagated on the bitcoin network. It does not become part of the shared ledger (the _blockchain_) until it is verified and included in a block by a process called _mining_. See <<ch8>> for a detailed explanation.
((("mining","blockchains")))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_. See <<ch8>> for a detailed explanation.
The bitcoin system of trust is based on computation. Transactions are bundled into _blocks_, which require an enormous amount of computation to prove, but only a small amount of computation to verify as proven. The mining process serves two purposes in bitcoin:
* Mining creates new bitcoins in each block, almost like a central bank printing new money. The amount of bitcoin created per block is fixed and diminishes with time.
* Mining creates trust by ensuring that transactions are only confirmed if enough computational power was devoted to the block that contains them. More blocks mean more computation, which means more trust.
* 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 bitcoins in each block, almost like a central bank printing new money. The amount of bitcoin created per block is limited and diminishes with time.
Mining achieves a fine balance between cost and reward. Mining uses electricity to solve a mathematical problem. A successful miner will collect _reward_ in the form of new bitcoin and transaction fees. However, the reward will only be collected if the miner has correctly validated all the transactions, to the satisfaction of the rules of _consensus_. This delicate balance provides security for bitcoin without a central authority.
A good way to describe mining is like a giant competitive game of sudoku that resets every time someone finds a solution and whose difficulty automatically adjusts so that it takes approximately 10 minutes to find a solution. Imagine a giant sudoku puzzle, several thousand rows and columns in size. If I show you a completed puzzle you can verify it quite quickly. However, if the puzzle has a few squares filled and the rest are empty, it takes a lot of work to solve! The difficulty of the sudoku can be adjusted by changing its size (more or fewer rows and columns), but it can still be verified quite easily even if it is very large. The "puzzle" used in bitcoin is based on a cryptographic hash and exhibits similar characteristics: it is asymmetrically hard to solve but easy to verify, and its difficulty can be adjusted.
In <<user-stories>>, we introduced Jing, a computer engineering student in Shanghai. Jing is participating in the bitcoin network as a miner. Every 10 minutes or so, Jing joins thousands of other miners in a global race to find a solution to a block of transactions. Finding such a solution, the so-called proof of work, requires quadrillions of hashing operations per second across the entire bitcoin network. The algorithm for proof of work involves repeatedly hashing the header of the block and a random number with the SHA256 cryptographic algorithm until a solution matching a predetermined pattern emerges. The first miner to find such a solution wins the round of competition and publishes that block into the blockchain.
In <<user-stories>>, we introduced Jing, an entrepreneur in Shanghai. Jing runs a _mining farm_ which is a business that runs thousands of specialized mining computers, competing for the reward. Every 10 minutes or so, Jing's mining computers compete against thousands of similar systems in a global race to find a solution to a block of transactions. Finding such a solution, the so-called _proof of work_, requires quadrillions of hashing operations per second across the entire bitcoin network. The algorithm for proof of work involves repeatedly hashing the header of the block and a random number with the SHA256 cryptographic algorithm until a solution matching a predetermined pattern emerges. The first miner to find such a solution wins the round of competition and publishes that block into the blockchain.
((("mining","profitability of")))Jing started mining in 2010 using a very fast desktop computer to find a suitable proof of work for new blocks. As more miners started joining the bitcoin network, the difficulty of the problem increased rapidly. Soon, Jing and other miners upgraded to more specialized hardware, such as high-end dedicated graphical processing units (GPUs) cards such as those used in gaming desktops or consoles. At the time of this writing, the difficulty is so high that it is profitable only to mine with application-specific integrated circuits (ASIC), essentially hundreds of mining algorithms printed in hardware, running in parallel on a single silicon chip. Jing also joined a "mining pool," which much like a lottery pool allows several participants to share their efforts and the rewards. Jing now runs two USB-connected ASIC machines to mine for bitcoin 24 hours a day. He pays his electricity costs by selling the bitcoin he is able to generate from mining, creating some income from the profits. His computer runs a copy of bitcoind, the reference bitcoin client, as a backend to his specialized mining software.
((("mining","profitability of")))Jing started mining in 2010 using a very fast desktop computer to find a suitable proof of work for new blocks. As more miners started joining the bitcoin network, the difficulty of the problem increased rapidly. Soon, Jing and other miners upgraded to more specialized hardware, such as high-end dedicated graphical processing units (GPUs) cards such as those used in gaming desktops or consoles. At the time of this writing, the difficulty is so high that it is profitable only to mine with application-specific integrated circuits (ASIC), essentially hundreds of mining algorithms printed in hardware, running in parallel on a single silicon chip. Jing's company also participates in a _mining pool_, which much like a lottery pool allows several participants to share their efforts and the rewards. Jing's company now runs a warehouse containing thousands of ASIC miners to mine for bitcoin 24 hours a day. The company pays its electricity costs by selling the bitcoin it is able to generate from mining, creating some income from the profits.
=== Mining Transactions in Blocks
((("mining","transactions in blocks")))((("transactions","mining in blocks")))A transaction transmitted across the network is not verified until it becomes part of the global distributed ledger, the blockchain. Every 10 minutes on average, miners generate a new block that contains all the transactions since the last block. New transactions are constantly flowing into the network from user wallets and other applications. As these are seen by the bitcoin network nodes, they get added to a temporary pool of unverified transactions maintained by each node. As miners build a new block, they add unverified transactions from this pool to a new block and then attempt to solve a very hard problem (a.k.a., proof of work) to prove the validity of that new block. The process of mining is explained in detail in <<mining>>.
((("mining","transactions in blocks")))((("transactions","mining in blocks")))New transactions are constantly flowing into the network from user wallets and other applications. As these are seen by the bitcoin network nodes, they get added to a temporary pool of unverified transactions maintained by each node. As miners construct a new block, they add unverified transactions from this pool to the new block and then attempt to prove the validity of that new block, with the mining algorith (proof-of-work). The process of mining is explained in detail in <<mining>>.
Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as he receives the previous block from the network, knowing he has lost that previous round of competition. He immediately creates a new block, fills it with transactions and the fingerprint of the previous block, and starts calculating the proof of work for the new block. Each miner includes a special transaction in his block, one that pays his own bitcoin address a reward of newly created bitcoins (currently 25 BTC per block). If he finds a solution that makes that block valid, he "wins" this reward because his successful block is added to the global blockchain and the reward transaction he included becomes spendable. Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round.
Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as he receives the previous block from the network, knowing he has lost that previous round of competition. He immediately creates a new block, fills it with transactions and the fingerprint of the previous block, and starts calculating the proof of work for the new block. Each miner includes a special transaction in his block, one that pays his own bitcoin address the block reward (currently 25 newly created bitcoin) plus the sum of transaction fees from all the transactions included in the block. If he finds a solution that makes that block valid, he "wins" this reward because his successful block is added to the global blockchain and the reward transaction he included becomes spendable. Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round.
Alice's transaction was picked up by the network and included in the pool of unverified transactions. Because it had sufficient fees, it was included in a new block generated by Jing's mining pool. Approximately five minutes after the transaction was first transmitted by Alice's wallet, Jing's ASIC miner found a solution for the block and published it as block #277316, containing 419 other transactions. Jing's ASIC miner published the new block on the bitcoin network, where other miners validated it and started the race to generate the next block.
Alice's transaction was picked up by the network and included in the pool of unverified transactions. Once validated by the mining software it was included in a new block generated by Jing's mining pool. Approximately five minutes after the transaction was first transmitted by Alice's wallet, One of Jing's ASIC miners found a solution for the block and published it as block #277316, containing 419 other transactions. Jing's ASIC miner sent the winning solution to the rest of the bitcoin network, where other miners validated it and started the race to generate the next block.
You can see the block that includes https://blockchain.info/block-height/277316[Alice's transaction].
A few minutes later, a new block, #277317, is mined by another miner. Because this new block is based on the previous block (#277316) that contained Alice's transaction, it added even more computation on top of that block, thereby strengthening the trust in those transactions. The block containing Alice's transaction is counted as one "confirmation" of that transaction. Each block mined on top of the one containing the transaction is an additional confirmation. As the blocks pile on top of each other, it becomes exponentially harder to reverse the transaction, thereby making it more and more trusted by the network.
A few minutes later, a new block, #277317, is mined by another miner. Because this new block is based on the previous block (#277316) that contained Alice's transaction, it added even more computation on top of that block, thereby strengthening the trust in those transactions. The block containing Alice's transaction is counted as one "confirmation" of that transaction. Each block mined on top of the one containing the transaction is an additional confirmation. As the blocks pile on top of each other, it becomes exponentially harder to reverse the transaction, thereby making it more and more trusted by the network.
In the diagram in <<block-alice1>> we can see block #277316, which contains Alice's transaction. Below it are 277,316 blocks (including block #0), linked to each other in a chain of blocks (blockchain) all the way back to block #0, known as the _genesis block_. Over time, as the "height" in blocks increases, so does the computation difficulty for each block and the chain as a whole. The blocks mined after the one that contains Alice's transaction act as further assurance, as they pile on more computation in a longer and longer chain. By convention, any block with more than six confirmations is considered irrevocable, because it would require an immense amount of computation to invalidate and recalculate six blocks. We will examine the process of mining and the way it builds trust in more detail in <<ch8>>.
@ -251,7 +252,7 @@ image::images/msbt_0209.png["Alice's transaction included in a block"]
((("transactions","spending")))Now that Alice's transaction has been embedded in the blockchain as part of a block, it is part of the distributed ledger of bitcoin and visible to all bitcoin applications. Each bitcoin client can independently verify the transaction as valid and spendable. Full-index clients can track the source of the funds from the moment the bitcoins were first generated in a block, incrementally from transaction to transaction, until they reach Bob's address. Lightweight clients can do what is called a simplified payment verification (see <<spv_nodes>>) by confirming that the transaction is in the blockchain and has several blocks mined after it, thus providing assurance that the network accepts it as valid.
Bob can now spend the output from this and other transactions, by creating his own transactions that reference these outputs as their inputs and assign them new ownership. For example, Bob can pay a contractor or supplier by transferring value from Alice's coffee cup payment to these new owners. Most likely, Bob's bitcoin software will aggregate many small payments into a larger payment, perhaps concentrating all the day's bitcoin revenue into a single transaction. This would move the various payments into a single address, used as the store's general "checking" account. For a diagram of an aggregating transaction, see <<transaction-aggregating>>.
Bob can now spend the output from this and other transactions, by creating his own transactions that reference these outputs as their inputs and assign them new ownership. For example, Bob can pay a contractor or supplier by transferring value from Alice's coffee cup payment to these new owners. Most likely, Bob's bitcoin software will aggregate many small payments into a larger payment, perhaps concentrating all the day's bitcoin revenue into a single transaction. This would aggregate the various payments into a single output (and a single address). For a diagram of an aggregating transaction, see <<transaction-aggregating>>.
As Bob spends the payments received from Alice and other customers, he extends the chain of transactions, which in turn are added to the global blockchain ledger for all to see and trust. Let's assume that Bob pays his web designer Gopesh in Bangalore for a new website page. Now the chain of transactions will look like <<block-alice2>>.(((range="endofrange", startref="ix_ch02-asciidoc0")))
Andreas M. Antonopoulos
8 years ago