Bitcoin Mechanics: Transaction Ledger

Bitcoin Mechanics

• Bitcoin uses a consensus mechanism that provides an append-only ledger.
• Data, once written, remains permanently.
• Miners execute a consensus protocol to validate transactions.
• Miners are incentivized by a digital currency.

Transaction-Based Ledger

• Each transaction tracks Alice's balance.
• Transactions specify a number of inputs and outputs.
• Inputs represent coins consumed that were created in prior transactions.
• Outputs represent newly created coins.
• When new currency is minted, there are no inputs.
• Each transaction has a unique ID, and outputs have indexes, starting at 0.

Change Addresses

• Transaction outputs must be fully consumed or not at all.
• Alice needs to send money to herself if she does want to consume an entire output.
• For example, Alice can send 17 of 25 bitcoins to Bob and 8 back to herself.
• The address that the 8 bitcoins are sent to must be owned by her, but can be different.
• This type of address is called a change address.

Efficient Transaction Verification

• The transaction output that Alice references is looked up by a hash pointer.
• The transaction output value must be 25 bitcoins.
• It also must not have been spent previously.
• Scan the block chain between the referenced and most recent block.
• Data structures can further improve speed.

Bitcoin Transaction Anatomy

• Each Bitcoin transaction consists of three parts: metadata, inputs, and outputs.

Transaction Metadata

• Includes the transaction size, the number of inputs, outputs, the transaction ID, and "lock_time."

Transaction Inputs

• An array specifying a previous transaction (hash pointer), the index of the previous transaction’s outputs, and a cryptographic signature.

Transaction Outputs

• An array where each output includes a value and a recipient address (script). If output values are less than the sum of input values, the miner keeping the difference as a transaction fee.

Bitcoin Scripts

• Bitcoin scripts specify arbitrary conditions for spending coins.
• An address is essentially a hash of a public key.
• Bitcoin only allows signing of an entire transaction.
• scriptPubKey means something can be redeemed by a public key that hashes to X, along with an owner's signature.
• scriptSig contains scripts instead of signatures.
• The scripting language is stack-based and not Turing-complete because it has no loops.
• It is built with cryptography in mind, with special instructions for hashing and signature verification.
• The combination of a new transaction's input script and the earlier transaction's output script validates transaction output redemption.

Bitcoin Script Applications

• Proof-of-burn bootstraps an alternative Bitcoin or adds arbitrary data to the blockchain.
• Pay-to-script-hash (P2SH) allows complicated conditions for spending coins and MULTISIG addresses.
• Escrow Transactions help mediate payment when Alice doesn’t want to pay until the goods arrive.
• Green addresses help when Bob is a street vendor selling hot dogs, and one would not want Alice to wait an hour for food.
• Micropayments help when Bob is providing Alice with a wireless service and charges her a small fee for every minute she talks on her phone.

Bitcoin Blocks

• It contains information related to the mining puzzle.
• Block headers include a changeable "nonce", a timestamp, and "bits" for difficulty indication.
• The transaction tree root, or "mrkl_root" field, is the only transaction data in the header.

Coinbase Transactions

• This is a transaction that creates new Bitcoins.
• It has only one input and one output.
• The input does not redeem a previous output; its hash pointer is null.
• The value of the output is the miner's revenue, which halves every 210,000 blocks (4 years).
• The output is the mining reward plus transaction fees.

The Bitcoin Network

• Bitcoin operates on a peer-to-peer network over TCP with a random topology.
• New nodes can join anytime; inactive nodes are forgotten after three hours.
• Joining requires contacting any existing node.
• Transactions are broadcast using a simple flooding or gossip protocol.

Race Condition

• Network latency can cause different views of the pending transaction pool among nodes.
• A race condition happens when nodes disagree on transactions for the next block due to double-spending.
• The miner of the next block ultimately resolves the tie.

New Block Propagation

• Announcing new blocks uses similar logic to propagating new transactions.
• Nodes forward blocks only if they extend the longest blockchain branch known to them.
• A 2013 study reported an average block propagation time of around 12.6 seconds.

Network Size

• The Bitcoin network included approximately 16,000 reachable nodes as of February 22, 2025.
• Running a full Bitcoin node as of February 22, 2025, needs 600 GB of storage and 2 GB of RAM.

Full Nodes

• Fully validating nodes must store the entire set of unspent transaction outputs (UTXOs) in RAM.
• The Bitcoin network has processed roughly 1.157 billion transactions since 2009 as of February 21, 2025.
• The Bitcoin network as of February 22, 2025, has approximately 80 million Unspent Transaction Outputs (UTXOs).
• The Bitcoin network handles about 500,000 transactions each day, as of February 22, 2025.

Thin Nodes

• Thin nodes are also named Simple Payment Verification (SPV) clients, and they verify only transactions they care about.
• Block headers take up only about 1/1,000 the size of the block chain.
• Bitcoin had about 840,000 blocks as of February 2025, or ~67 MB.

Node Requirements

• Full Node Requirements:
  • 1 TB SSD storage, with the blockchain being ~550 GB as of 2025.
  • 4 GB RAM (8 GB+ is recommended).
  • Intel i5/i7, AMD Ryzen 5/7 CPU, or equivalent.
  • 500 GB/month Internet connection with a minimum of 50 Mbps speed.
• SPV Node Requirements:
  • <10 MB storage for block headers.
  • 512 MB+ RAM.
  • Low-end CPU (e.g., Raspberry Pi, smartphones).
  • ~10 MB/month Internet connection for headers.

Limitations

• The Bitcoin protocol has many constraints that are hard-coded, which can affect the system.
• Total number of Bitcoins, mining incentives, and the limits the average time per block are not malleable.
• These limitations are set on the average time per block, signature operations in a block, and the divisibility of the currency.

System Throughput

• Each block is limited to one megabyte.
• Each transaction is at least 250 bytes.
• Each block can handle 4,000 transactions.
• Blocks are found about every 10 minutes, creating about 7 transactions per second.
• Bitcoin's cryptographic algorithms are fixed.
• Software updates don't guarantee universal adoption across all nodes.

Hard Forks

• The new software recognizes blocks as valid; the old software rejects them.
• Most nodes have upgraded, but some have not, so the blockchain splits.
• The longest branch will contain blocks invalid to old nodes.
• The old nodes will work on a block chain branch excluding the new feature.
• The branches will never join, considered unacceptable.

Soft Forks

• Features are added to make validation rules stricter.
• The old version accepts all blocks; the new version rejects some.
• If the majority of nodes switch to the new software, they can enforce the new rules.
• P2SH is an example.

Hard Fork vs. Soft Fork

• A hard fork is a major protocol upgrade and is not backward compatible. This creates a split in the blockchain.
• A soft fork is a minor protocol upgrade and is backward compatible. Old nodes recognize new blocks but may not enforce all the new rules.