How Bitcoin Works

Transactions, Blocks, Mining, and the Blockchain

The bitcoin system, unlike traditional banking and payment systems, is based on decentralized 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. Subsequent chapters will delve into the technology behind transactions, the network, and mining.

Bitcoin Overview

In the overview diagram shown in Figure 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.

Each example in this chapter 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 to the blockchain, we will use a 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.

Figure 2-1.

Popular blockchain explorers include:
• Bitcoin Block Explorer
• BlockCypher Explorer
• BitPay Insight
Each of these has a search function that can take a bitcoin address, transaction hash, block number, or block hash and retrieve corresponding information from the bitcoin network.

With each transaction or block example, we will provide a URL so you can look it up yourself and study it in detail.


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