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@ -19,7 +19,7 @@ Each of these has a search function that can take an address, transaction hash,
==== Bitcoin Overview
In the overview diagram shown in <<bitcoin-overview 2-1>>, 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 wallets, mining, and merchant systems.
[[bitcoin-overview]]
.Bitcoin overview
@ -28,7 +28,7 @@ image::images/msbt_0201.png["Bitcoin Overview"]
[[cup_of_coffee]]
==== Buying a Cup of Coffee
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 2-2>>):
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>>):
----
Total:
@ -78,7 +78,7 @@ The bitcoin network can transact in fractional values, e.g., from milli-bitcoins
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 are like lines in a double-entry bookkeeping ledger. In simple terms, each transaction contains one or more "inputs," which are debits against a bitcoin account. 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 2-3>>.
Transactions are like lines in a double-entry bookkeeping ledger. In simple terms, each transaction contains one or more "inputs," which are debits against a bitcoin account. 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>>.
[[transaction-double-entry]]
.Transaction as double-entry bookkeeping
@ -89,7 +89,7 @@ The transaction also contains proof of ownership for each amount of bitcoin (inp
[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 2-4>>).
_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>>).
====
@ -97,23 +97,23 @@ _Transactions_ move value from _transaction inputs_ to _transaction outputs_. An
.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 utilizes 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 2-4>>.
Alice's payment to Bob's Cafe utilizes 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>>.
==== Common Transaction Forms
The most common form of transaction is a simple payment from one address to another, which often includes some "change" returned to the original owner. This type of transaction has one input and two outputs and is shown below in <<transaction-common 2-5>>.
The most common form of transaction is a simple payment from one address to another, which often includes some "change" returned to the original owner. This type of transaction has one input and two outputs and is shown below in <<transaction-common>>.
[[transaction-common]]
.Most common transaction
image::images/msbt_0205.png["Common Transaction"]
Another common form of transaction is one that aggregates several inputs into a single output (see <<transaction-aggregating 2-6>>). This represents the real-world equivalent of exchanging a pile of coins and currency notes for a single larger note. Transactions like these are sometimes generated by wallet applications to clean up lots of smaller amounts that were received as change for payments.
Another common form of transaction is one that aggregates several inputs into a single output (see <<transaction-aggregating>>). This represents the real-world equivalent of exchanging a pile of coins and currency notes for a single larger note. Transactions like these are sometimes generated by wallet applications to clean up lots of smaller amounts that were received as change for payments.
[[transaction-aggregating]]
.Transaction aggregating funds
image::images/msbt_0206.png["Aggregating Transaction"]
Finally, another transaction form that is seen often on the bitcoin ledger is a transaction that distributes one input to multiple outputs representing multiple recipients (see <<transaction-distributing 2-7>>). This type of transaction is sometimes used by commercial entities to distribute funds, such as when processing payroll payments to multiple employees.
Finally, another transaction form that is seen often on the bitcoin ledger is a transaction that distributes one input to multiple outputs representing multiple recipients (see <<transaction-distributing>>). This type of transaction is sometimes used by commercial entities to distribute funds, such as when processing payroll payments to multiple employees.
[[transaction-distributing]]
.Transaction distributing funds
@ -175,7 +175,7 @@ This transaction will also include a second output, because Alice's funds are in
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.
The resulting transaction can be seen using a blockchain explorer web application, as shown in <<transaction-alice 2-8>>.
The resulting transaction can be seen using a blockchain explorer web application, as shown in <<transaction-alice>>.
[[transaction-alice]]
.Alice's transaction to Bob's Cafe
@ -238,7 +238,7 @@ https://blockchain.info/block-height/277316.
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 2-9>> 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, 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 <<mining>>.
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, 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 <<mining>>.
[[block-alice1]]
.Alice's transaction included in block #277316
@ -250,7 +250,7 @@ Now that Alice's transaction has been embedded in the blockchain as part of a bl
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, utilized as the store's general "checking" account. 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 web site page. Now the chain of transactions will look like <<block-alice2 2-10>>.
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 web site page. Now the chain of transactions will look like <<block-alice2>>.
[[block-alice2]]
.Alice's transaction as part of a transaction chain from Joe to Gopesh