Bitcoin Blockchain

- What is

Bitcoin Blockchain

A decentralized peer-to-peer network
A public transaction ledger
A set of rules for independent transaction validation and currency issuance

Explanation:

Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. Units of currency called bitcoin are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol primarily via the internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible.
Users can transfer bitcoin over the network to do just about anything that can be done with conventional currencies, including buy and sell goods, send money to people or organizations, or extend credit. Bitcoin can be purchased, sold, and exchanged for other currencies at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the internet because it is fast, secure, and borderless.
Unlike traditional currencies, bitcoin are entirely virtual. There are no physical coins or even digital coins per se. The coins are implied in transactions that transfer value from sender to recipient. Users of bitcoin own keys that allow them to prove ownership of bitcoin in the bitcoin network.
With these keys they can sign transactions to unlock the value and spend it by transferring it to a new owner. Keys are often stored in a digital wallet on each user’s computer or smartphone. Possession of the key that can sign a transaction is the only prerequisite to spending bitcoin, putting the control entirely in the hands of each user.
Bitcoin is a distributed, peer-to-peer system. As such there is no “central” server or point of control. Bitcoin are created through a process called “mining,” which involves competing to find solutions to a mathematical problem while processing bitcoin transactions. Any participant in the bitcoin network (i.e., anyone using a device running the full bitcoin protocol stack) may operate as a miner, using their computer’s processing power to verify and record transactions. Every 10 minutes, on average, a bitcoin miner is ableto validate the transactions of the past 10 minutes and is rewarded with brand new bitcoin. Essentially, bitcoin mining decentralizes the currency-issuance and clearing functions of a central bank and replaces the need for any central bank.
The bitcoin protocol includes built-in algorithms that regulate the mining function across the network. The difficulty of the processing task that miners must perform is adjusted dynamically so that, on average, someone succeeds every 10 minutes regardless of how many miners (and how much processing) are competing at any moment. The protocol also halves the rate at which new bitcoin are created every 4 years, and limits the total number of bitcoin that will be created to a fixed total just below 21 million coins. The result is that the number of bitcoin in circulation closely follows an easily predictable curve that approaches 21 million by the year 2140. Due to bitcoin’s diminishing rate of issuance, over the long term, the bitcoin currency is deflationary. Furthermore, bitcoin cannot be inflated by “printing” new money above and beyond the expected issuance rate.

History:

Bitcoin was invented in 2008 with the publication of a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” 1 written under the alias of Satoshi Nakamoto (see Appendix A). Nakamoto combined several prior inventions such as b-money and HashCash to create a completely decentralized electronic cash system that does not rely on a central authority for currency issuance or settlement and validation of transactions. The key innovation was to use a distributed computation system (called a “Proof-of-Work” algorithm) to conduct a global “election” every 10 minutes, allowing the decentralized network to arrive at consensus about the state of transactions. This elegantly solves the issue of double-spend where a single currency unit can be spent twice. Previously, the double-spend problem was a weakness of digital currency and was addressed by clearing all transactions through a central clearinghouse.
The bitcoin network started in 2009, based on a reference implementation published by Nakamoto and since revised by many other programmers. The implementation of the Proof-of-Work algorithm (mining) that provides security and resilience for bitcoin has increased in power exponentially, and now exceeds the combined processing power of the world’s top supercomputers. Bitcoin’s total market value has at times exceeded $35 billion US dollars, depending on the bitcoin-to-dollar exchange rate. The largest transaction processed so far by the network was $150 million US dollars, transmitted instantly and processed without any fees.
Satoshi Nakamoto withdrew from the public in April 2011, leaving the responsibility of developing the code and network to a thriving group of volunteers. The identity of the person or people behind bitcoin is still unknown. However, neither Satoshi Nakamoto nor anyone else exerts individual control over the bitcoin system, which operates based on fully transparent mathematical principles, open source code, and consensus among participants. The invention itself is groundbreaking and has already spawned new science in the fields of distributed computing, economics, and econometrics.

Choosing Bitcoin Wallet:

Bitcoin wallets are one of the most actively developed applications in the bitcoin ecosystem. There is intense competition, and while a new wallet is probably being developed right now, several wallets from last year are no longer actively maintained. Many wallets focus on specific platforms or specific uses and some are more suitable for beginners while others are filled with features for advanced users. Choosing a wallet is highly subjective and depends on the use and user expertise. It is therefore impossible to recommend a specific brand or project of wallet. However, we can categorize bitcoin wallets according to their platform and function and provide some clarity about all the different types of wallets that exist. Better yet, moving money between bitcoin wallets is easy, cheap, and fast, so it is worth trying out several different wallets until you find one that fits your needs.

Bitcoin wallets can be categorized as follows, according to the platform:

Desktop Wallet:

A desktop wallet was the first type of bitcoin wallet created as a reference implementation and many users run desktop wallets for the features, autonomy, and control they offer. Running on general-use operating systems such as Windows and Mac OS has certain security disadvantages however, as these platforms are often insecure and poorly configured.

Mobile Wallet:

A mobile wallet is the most common type of bitcoin wallet. Running on smart-phone operating systems such as Apple iOS and Android, these wallets are often a great choice for new users. Many are designed for simplicity and ease-of-use, but there are also fully featured mobile wallets for power users.

Web Wallet:

Web wallets are accessed through a web browser and store the user’s wallet on a server owned by a third party. This is similar to webmail in that it relies entirely on a third-party server. Some of these services operate using client-side code running in the user’s browser, which keeps control of the bitcoin keys in the hands of the user. Most, however, present a compromise by taking control of the bitcoin keys from users in exchange for ease-of-use. It is inadvisable to store large amounts of bitcoin on third-party systems.

Hardware Wallet:

Hardware wallets are devices that operate a secure self-contained bitcoin wallet on special-purpose hardware. They are operated via USB with a desktop web browser or via near-field-communication (NFC) on a mobile device. By handling all bitcoin-related operations on the specialized hardware, these wallets are considered very secure and suitable for storing large amounts of bitcoin.

Paper Wallet:

The keys controlling bitcoin can also be printed for long-term storage. These are known as paper wallets even though other materials (wood, metal, etc.) can be used. Paper wallets offer a low-tech but highly secure means of storing bitcoin long term. Offline storage is also often referred to as cold storage.

Another way to categorize bitcoin wallets is by their degree of autonomy and how they interact with the bitcoin network:

Full-node Client:

A full client, or “full node,” is a client that stores the entire history of bitcoin transactions (every transaction by every user, ever), manages users’ wallets, and can initiate transactions directly on the bitcoin network. A full node handles all aspects of the protocol and can independently validate the entire blockchain and any transaction. A full- node client consumes substantial computer resources (e.g., more than 125 GB of disk, 2 GB of RAM) but offers complete autonomy and independent transaction verification.

Lightweight Client:

A lightweight client, also known as a simple-payment-verification (SPV) client, connects to bitcoin full nodes (mentioned previously) for access to the bitcoin transaction information, but stores the user wallet locally and independently creates, validates, and transmits transactions. Lightweight clients interact directly with the bitcoin network, without an intermediary.

Third-party API Client:

A third-party API client is one that interacts with bitcoin through a third- party system of application programming interfaces (APIs), rather than by connecting to the bitcoin network directly. The wallet may be stored by the user or by third-party servers, but all transactions go through a third party.

- Working of

Bitcoin 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.

Buying a Cup of Coffee:

Alice, is a new user who has just acquired her 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 its 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 it into the register, as he does for all transactions. The point- of-sale system automatically converts the total price from US dollars to bitcoin at the prevailing market rate and displays the price in both currencies Bob says, “That’s one-dollar-fifty, or fifteen millibits.”
Bob’s point-of-sale system will also automatically create a special QR code containing a payment request.
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.
Alice uses her smartphone to scan the barcode on display. Her smartphone shows a payment of 0.0150 BTC to Bob’s Cafe and she selects Send to authorize the payment. Within a few seconds (about the same amount of time as a credit card authorization), Bob sees the transaction on the register, completing the transaction.

Bitcoin Transaction:

In simple terms, a transaction tells the network that the owner of some bitcoin value has authorized the transfer of that 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.

Transaction Inputs & Outputs:

Transactions are like lines in a double-entry bookkeeping ledger. Each transaction contains one or more “inputs,” which are like debits against a bitcoin account. 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.
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.

Transaction Chains:

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.

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.
Another common form of transaction is one that aggregates several inputs into a single output.
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.
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. This type of transaction is sometimes used by commercial entities to distribute funds, such as when processing payroll payments to multiple employees.

Constructing a Transaction:

Alice’s wallet application contains all the logic for selecting appropriate inputs and outputs to build a transaction to Alice’s specification. Alice only needs to specify a destination and an amount, and the rest happens in the wallet application without her seeing the details. Importantly, a wallet application can construct transactions even if it is completely offline. Like writing a check at home and later sending it to the bank in an envelope, the transaction does not need to be constructed and signed while connected to the bitcoin network.

Adding the Transaction to the 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.

- What is

Bitcoin Mining

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.

Mining Purposes:

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 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 bitcoin 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 a 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.

Mining Transactions 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 algorithm (Proof-of-Work).

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 12.5 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. Once validated by the mining software it was included in a new block, called a candidate block, generated by Jing’s mining pool. All the miners participating in that mining pool immediately start computing Proof-of-Work for the candidate block. Approximately five minutes after the transaction was first transmitted by Alice’s wallet, one of Jing’s ASIC miners found a solution for the candidate block and announced it to the network. Once other miners validated the winning block they started the race to generate the next block.

- What are

Keys & Addresses

Ownership of bitcoin is established through digital keys, bitcoin addresses, and digital signatures.

Public Key Cryptography and Cryptocurrency:

Public key cryptography was invented in the 1970s and is a mathematical foundation for computer and information security.
Since the invention of public key cryptography, several suitable mathematical functions, such as prime number exponentiation and elliptic curve multiplication, have been discovered. These mathematical functions are practically irreversible, meaning that they are easy to calculate in one direction and infeasible to calculate in the opposite direction. Based on these mathematical functions, cryptography enables the creation of digital secrets and unforgeable digital signatures. Bitcoin uses elliptic curve multiplication as the basis for its cryptography.

In bitcoin, we use public key cryptography to create a key pair that controls access to bitcoin. The key pair consists of a private key and — derived from it — a unique public key. The public key is used to receive funds, and the private key is used to sign transactions to spend the funds.
There is a mathematical relationship between the public and the private key that allows the private key to be used to generate signatures on messages. This signature can be validated against the public key without revealing the private key.

When spending bitcoin, the current bitcoin owner presents her public key and a signature (different each time, but created from the same private key) in a transaction to spend those bitcoin. Through the presentation of the public key and signature, everyone in the bitcoin network can verify and accept the transaction as valid, confirming that the person transferring the bitcoin owned them at the time of the transfer.

Private and Public Keys:

A bitcoin wallet contains a collection of key pairs, each consisting of a private key and a public key. The private key (k) is a number, usually picked at random. From the private key, we use elliptic curve multiplication, a one- way cryptographic function, to generate a public key (K). From the public key (K), we use a one-way cryptographic hash function to generate a bitcoin address (A). In this section, we will start with generating the private key, look at the elliptic curve math that is used to turn that into a public key, and finally, generate a bitcoin address from the public key.

Private Keys:

A private key is simply a number, picked at random. Ownership and control over the private key is the root of user control over all funds associated with the corresponding bitcoin address. The private key is used to create signatures that are required to spend bitcoin by proving ownership of funds used in a transaction. The private key must remain secret at all times, because revealing it to third parties is equivalent to giving them control over the bitcoin secured by that key. The private key must also be backed up and protected from accidental loss, because if it’s lost it cannot be recovered and the funds secured by it are forever lost, too.

Public Keys:

The public key is calculated from the private key using elliptic curve multiplication, which is irreversible: K = k * G, where k is the private key, G is a constant point called the generator point, and K is the resulting public key. The reverse operation, known as “finding the discrete logarithm” — calculating k if you know K — is as difficult as trying all possible values of k, i.e., a brute-force search. Before we demonstrate how to generate a public key from a private key, let’s look at elliptic curve cryptography in a bit more detail.

Bitcoin Addresses:

A bitcoin address is a string of digits and characters that can be shared with anyone who wants to send you money. Addresses produced from public keys consist of a string of numbers and letters, beginning with the digit “1”.
The bitcoin address is what appears most commonly in a transaction as the “recipient” of the funds. If we compare a bitcoin transaction to a paper check, the bitcoin address is the beneficiary, which is what we write on the line after “Pay to the order of.” On a paper check, that beneficiary can sometimes be the name of a bank account holder, but can also include corporations, institutions, or even cash. Because paper checks do not need to specify an account, but rather use an abstract name as the recipient of funds, they are very flexible payment instruments. Bitcoin transactions use a similar abstraction, the bitcoin address, to make them very flexible. A bitcoin address can represent the owner of a private/public key pair, or it can represent something else, such as a payment script.
For now, let’s examine the simple case, a bitcoin address that represents, and is derived from, a public key.
The bitcoin address is derived from the public key through the use of one- way cryptographic hashing. A “hashing algorithm” or simply “hash algorithm” is a one-way function that produces a fingerprint or “hash” of an arbitrary-sized input. Cryptographic hash functions are used extensively in bitcoin: in bitcoin addresses, in script addresses, and in the mining Proof-of- Work algorithm. The algorithms used to make a bitcoin address from a public key are the Secure Hash Algorithm (SHA) and the RACE Integrity Primitives Evaluation Message Digest (RIPEMD), specifically SHA256 and RIPEMD160.

Digital Signatures:

The digital signature algorithm used in bitcoin is the Elliptic Curve Digital Signature Algorithm, or ECDSA. ECDSA is the algorithm used for digital signatures based on elliptic curve private/public key pairs.
ECDSA is used by the script functions OP_CHECKSIG , OP_CHECKSIGVERIFY , OP_CHECKMULTISIG , and OP_CHECKMULTISIGVERIFY . Any time you see those in a locking script, the unlocking script must contain an ECDSA signature.

A digital signature serves three purposes in bitcoin (see the following sidebar). First, the signature proves that the owner of the private key, who is by implication the owner of the funds, has authorized the spending of those funds. Secondly, the proof of authorization is undeniable (nonrepudiation).
Thirdly, the signature proves that the transaction (or specific parts of the transaction) have not and cannot be modified by anyone after it has been signed.

Note that each transaction input is signed independently. This is critical, as neither the signatures nor the inputs have to belong to or be applied by the same “owners.” In fact, a specific transaction scheme called “CoinJoin” uses this fact to create multi-party transactions for privacy.

How Digital Signatures Work:

A digital signature is a mathematical scheme that consists of two parts. The first part is an algorithm for creating a signature, using a private key (the signing key), from a message (the transaction). The second part is an algorithm that allows anyone to verify the signature, given also the message and a public key.

- What is

Bitcoin Network

Bitcoin is structured as a peer-to-peer network architecture on top of the internet.

Peer-to-Peer Network Architecture:

The term peer-to-peer, or P2P, means that the computers that participate in the network are peers to each other, that they are all equal, that there are no “special” nodes, and that all nodes share the burden of providing network services. The network nodes interconnect in a mesh network with a “flat” topology. There is no server, no centralized service, and no hierarchy within the network. Nodes in a P2P network both provide and consume services at the same time with reciprocity acting as the incentive for participation. P2P networks are inherently resilient, decentralized, and open.

A preeminent example of a P2P network architecture was the early internet itself, where nodes on the IP network were equal. Today’s internet architecture is more hierarchical, but the Internet Protocol still retains its flat- topology essence. Beyond bitcoin, the largest and most successful application of P2P technologies is file sharing, with Napster as the pioneer and BitTorrent as the most recent evolution of the architecture.

Bitcoin’s P2P network architecture is much more than a topology choice.
Bitcoin is a P2P digital cash system by design, and the network architecture is both a reflection and a foundation of that core characteristic.
Decentralization of control is a core design principle that can only be achieved and maintained by a flat, decentralized P2P consensus network.

The term “bitcoin network” refers to the collection of nodes running the bitcoin P2P protocol. In addition to the bitcoin P2P protocol, there are other protocols such as Stratum that are used for mining and lightweight or mobile wallets. These additional protocols are provided by gateway routing servers that access the bitcoin network using the bitcoin P2P protocol and then extend that network to nodes running other protocols. For example, Stratum servers connect Stratum mining nodes via the Stratum protocol to the main bitcoin network and bridge the Stratum protocol to the bitcoin P2P protocol.
We use the term “extended bitcoin network” to refer to the overall network that includes the bitcoin P2P protocol, pool-mining protocols, the Stratum protocol, and any other related protocols connecting the components of the bitcoin system.

The Extended Bitcoin Network:

The main bitcoin network, running the bitcoin P2P protocol, consists of between 5,000 and 8,000 listening nodes running various versions of the bitcoin reference client (Bitcoin Core) and a few hundred nodes running various other implementations of the bitcoin P2P protocol, such as Bitcoin Classic, Bitcoin Unlimited, BitcoinJ, Libbitcoin, btcd, and bcoin. A small percentage of the nodes on the bitcoin P2P network are also mining nodes, competing in the mining process, validating transactions, and creating new blocks. Various large companies interface with the bitcoin network by running full-node clients based on the Bitcoin Core client, with full copies of the blockchain and a network node, but without mining or wallet functions.
These nodes act as network edge routers, allowing various other services (exchanges, wallets, block explorers, merchant payment processing) to be built on top.

The extended bitcoin network includes the network running the bitcoin P2P protocol, described earlier, as well as nodes running specialized protocols.
Attached to the main bitcoin P2P network are a number of pool servers and protocol gateways that connect nodes running other protocols. These other protocol nodes are mostly pool mining nodes and lightweight wallet clients, which do not carry a full copy of the blockchain.

Transaction Pools

Almost every node on the bitcoin network maintains a temporary list of unconfirmed transactions called the memory pool, mempool, or transaction pool. Nodes use this pool to keep track of transactions that are known to the network but are not yet included in the blockchain. For example, a wallet node will use the transaction pool to track incoming payments to the user’s wallet that have been received on the network but are not yet confirmed.
As transactions are received and verified, they are added to the transaction pool and relayed to the neighboring nodes to propagate on the network.

Some node implementations also maintain a separate pool of orphaned transactions. If a transaction’s inputs refer to a transaction that is not yet known, such as a missing parent, the orphan transaction will be stored temporarily in the orphan pool until the parent transaction arrives.
When a transaction is added to the transaction pool, the orphan pool is checked for any orphans that reference this transaction’s outputs (its children). Any matching orphans are then validated. If valid, they are removed from the orphan pool and added to the transaction pool, completing the chain that started with the parent transaction. In light of the newly added transaction, which is no longer an orphan, the process is repeated recursively looking for any further descendants, until no more descendants are found.

Through this process, the arrival of a parent transaction triggers a cascade reconstruction of an entire chain of interdependent transactions by re-uniting the orphans with their parents all the way down the chain.
Both the transaction pool and orphan pool (where implemented) are stored in local memory and are not saved on persistent storage; rather, they are dynamically populated from incoming network messages. When a node starts, both pools are empty and are gradually populated with new transactions received on the network.

- What is

Bitcoin Block

The blockchain data structure is an ordered, back-linked list of blocks of transactions. The blockchain can be stored as a flat file, or in a simple database.

Structure of a Block:

A block is a container data structure that aggregates transactions for inclusion in the public ledger, the blockchain. The block is made of a header, containing metadata, followed by a long list of transactions that make up the bulk of its size. The block header is 80 bytes, whereas the average transaction is at least 250 bytes and the average block contains more than 500 transactions. A complete block, with all transactions, is therefore 1,000 times larger than the block header.

Block Header:

The block header consists of three sets of block metadata. First, there is a reference to a previous block hash, which connects this block to the previous block in the blockchain. The second set of metadata, namely the difficulty, timestamp, and nonce, relate to the mining competition. The third piece of metadata is the merkle tree root, a data structure used to efficiently summarize all the transactions in the block.
The nonce, difficulty target, and timestamp are used in the mining process.

Block Identifiers: Block Header Hash and Block Height

The primary identifier of a block is its cryptographic hash, a digital fingerprint, made by hashing the block header twice through the SHA256 algorithm. The resulting 32-byte hash is called the block hash but is more accurately the block header hash, because only the block header is used to compute it. For example,

000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

is the block hash of the first bitcoin block ever created. The block hash identifies a block uniquely and unambiguously and can be independently derived by any node by simply hashing the block header.
Note that the block hash is not actually included inside the block’s data structure, neither when the block is transmitted on the network, nor when it is stored on a node’s persistence storage as part of the blockchain. Instead, the block’s hash is computed by each node as the block is received from the network. The block hash might be stored in a separate database table as part of the block’s metadata, to facilitate indexing and faster retrieval of blocks from disk.

A second way to identify a block is by its position in the blockchain, called the block height. The first block ever created is at block height 0 (zero) and is the same block that was previously referenced by the following block hash

000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f .

A block can thus be identified two ways: by referencing the block hash or by referencing the block height. Each subsequent block added “on top” of that first block is one position “higher” in the blockchain, like boxes stacked one on top of the other. The block height on January 1, 2017 was approximately 446,000, meaning there were 446,000 blocks stacked on top of the first block created in January 2009.

Unlike the block hash, the block height is not a unique identifier. Although a single block will always have a specific and invariant block height, the reverse is not true — the block height does not always identify a single block.
Two or more blocks might have the same block height, competing for the same position in the blockchain. The block height is also not a part of the block’s data structure; it is not stored within the block. Each node dynamically identifies a block’s position (height) in the blockchain when it is received from the bitcoin network. The block height might also be stored as metadata in an indexed database table for faster retrieval.

The Genesis Block:

The first block in the blockchain is called the genesis block and was created in 2009. It is the common ancestor of all the blocks in the blockchain, meaning that if you start at any block and follow the chain backward in time, you will eventually arrive at the genesis block.

Every node always starts with a blockchain of at least one block because the genesis block is statically encoded within the bitcoin client software, such that it cannot be altered. Every node always “knows” the genesis block’s hash and structure, the fixed time it was created, and even the single transaction within. Thus, every node has the starting point for the blockchain, a secure “root” from which to build a trusted blockchain.

The following identifier hash belongs to the genesis block:

000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

You can search for that block hash in any block explorer website, such as blockchain.info, and you will find a page describing the contents of this block, with a URL containing that hash:

https://blockchain.info/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172
https://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763

The genesis block contains a hidden message within it. The coinbase transaction input contains the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This message was intended to offer proof of the earliest date this block was created, by referencing the headline of the British newspaper The Times. It also serves as a tongue-in-cheek reminder of the importance of an independent monetary system, with bitcoin’s launch occurring at the same time as an unprecedented worldwide monetary crisis.
The message was embedded in the first block by Satoshi Nakamoto, bitcoin’s creator.

Merkle Trees:

Each block in the bitcoin blockchain contains a summary of all the transactions in the block using a merkle tree.
A merkle tree, also known as a binary hash tree, is a data structure used for efficiently summarizing and verifying the integrity of large sets of data.
Merkle trees are binary trees containing cryptographic hashes. The term “tree” is used in computer science to describe a branching data structure, but these trees are usually displayed upside down with the “root” at the top and the “leaves” at the bottom of a diagram.

Merkle trees are used in bitcoin to summarize all the transactions in a block, producing an overall digital fingerprint of the entire set of transactions, providing a very efficient process to verify whether a transaction is included in a block. A merkle tree is constructed by recursively hashing pairs of nodes until there is only one hash, called the root, or merkle root. The cryptographic hash algorithm used in bitcoin’s merkle trees is SHA256 applied twice, also known as double-SHA256.

When N data elements are hashed and summarized in a merkle tree, you can check to see if any one data element is included in the tree with at most 2*log 2 (N) calculations, making this a very efficient data structure.

Merkle Trees and Simplified Payment Verification(SPV):

Merkle trees are used extensively by SPV nodes. SPV nodes don’t have all transactions and do not download full blocks, just block headers. In order to verify that a transaction is included in a block, without having to download all the transactions in the block, they use an authentication path, or merkle path.

Consider, for example, an SPV node that is interested in incoming payments to an address contained in its wallet. The SPV node will establish a bloom filter on its connections to peers to limit the transactions received to only those containing addresses of interest. When a peer sees a transaction that matches the bloom filter, it will send that block using a merkleblock message. The merkleblock message contains the block header as well as a merkle path that links the transaction of interest to the merkle root in the block. The SPV node can use this merkle path to connect the transaction to the block and verify that the transaction is included in the block. The SPV node also uses the block header to link the block to the rest of the blockchain. The combination of these two links, between the transaction and block, and between the block and blockchain, proves that the transaction is recorded in the blockchain. All in all, the SPV node will have received less than a kilobyte of data for the block header and merkle path, an amount of data that is more than a thousand times less than a full block (about 1 megabyte currently).

- What is

Bitcoin Forks

In “Blockchain Forks” we looked at how the bitcoin network may briefly diverge, with two parts of the network following two different branches of the blockchain for a short time.

Hard Fork:

We saw how this process occurs naturally, as part of the normal operation of the network and how the network reconverges on a common blockchain after one or more blocks are mined.
There is another scenario in which the network may diverge into following two chains: a change in the consensus rules. This type of fork is called a hard fork, because after the fork the network does not reconverge onto a single chain. Instead, the two chains evolve independently. Hard forks occur when part of the network is operating under a different set of consensus rules than the rest of the network. This may occur because of a bug or because of a deliberate change in the implementation of the consensus rules.

Hard forks can be used to change the rules of consensus, but they require coordination between all participants in the system. Any nodes that do not upgrade to the new consensus rules are unable to participate in the consensus mechanism and are forced onto a separate chain at the moment of the hard fork. Thus, a change introduced by a hard fork can be thought of as not “forward compatible,” in that nonupgraded systems can no longer process the new consensus rules.

Later, however, at block height 6, a hard fork occurs. Let’s assume that a new implementation of the client is released with a change in the consensus rules.
Starting on block height 7, miners running this new implementation will accept a new type of digital signature, let’s call it a “Smores” signature, that is not ECDSA based. Immediately after, a node running the new implementation creates a transaction that contains a Smores signature and a miner with the updated software mines block 7b containing this transaction.

Any node or miner that has not upgraded the software to validate Smores signatures is now unable to process block 7b. From their perspective, both the transaction that contained a Smores signature and block 7b that contained that transaction are invalid, because they are evaluating them based upon the old consensus rules. These nodes will reject the transaction and the block and will not propagate them. Any miners that are using the old rules will not accept block 7b and will continue to mine a candidate block whose parent is block 6. In fact, miners using the old rules may not even receive block 7b if all the nodes they are connected to are also obeying the old rules and therefore not propagating the block. Eventually, they will be able to mine block 7a, which is valid under the old rules and does not contain any transactions with Smores signatures.

The two chains continue to diverge from this point. Miners on the “b” chain will continue to accept and mine transactions containing Smores signatures, while miners on the “a” chain will continue to ignore these transactions. Even if block 8b does not contain any Smores-signed transactions, the miners on the “a” chain cannot process it. To them it appears to be an orphan block, as its parent “7b” is not recognized as a valid block.

Soft Fork

Not all consensus rule changes cause a hard fork. Only consensus changes that are forward-incompatible cause a fork. If the change is implemented in such a way that an unmodified client still sees the transaction or block as valid under the previous rules, the change can happen without a fork.

The term soft fork was introduced to distinguish this upgrade method from a “hard fork.” In practice, a soft fork is not a fork at all. A soft fork is a forward-compatible change to the consensus rules that allows unupgraded clients to continue to operate in consensus with the new rules.

One aspect of soft forks that is not immediately obvious is that soft fork upgrades can only be used to constrain the consensus rules, not to expand them. In order to be forward compatible, transactions and blocks created under the new rules must be valid under the old rules too, but not vice versa. The new rules can only limit what is valid; otherwise, they will trigger a hard fork when rejected under the old rules.

Soft forks can be implemented in a number of ways — the term does not define a single method, rather a set of methods that all have one thing in common: they don’t require all nodes to upgrade or force nonupgraded nodes out of consensus.

- What is

Bitcoin Blockchain

Explanation:

History:

Choosing Bitcoin Wallet:

Desktop Wallet:

Mobile Wallet:

Web Wallet:

Hardware Wallet:

Paper Wallet:

Full-node Client:

Lightweight Client:

Third-party API Client:

- Working of

Bitcoin Blockchain

Buying a Cup of Coffee:

Bitcoin Transaction:

Transaction Inputs & Outputs:

Transaction Chains:

Common Transaction Forms:

Constructing a Transaction:

Adding the Transaction to the Ledger:

- What is

Bitcoin Mining

Mining Purposes:

Mining Transactions in Blocks:

- What are

Keys & Addresses

Public Key Cryptography and Cryptocurrency:

Private and Public Keys:

Private Keys:

Public Keys:

Bitcoin Addresses:

Digital Signatures:

How Digital Signatures Work:

- What is

Bitcoin Network

Peer-to-Peer Network Architecture:

The Extended Bitcoin Network:

Transaction Pools

- What is

Bitcoin Block

Structure of a Block:

Block Header:

Block Identifiers: Block Header Hash and Block Height

The Genesis Block:

Merkle Trees:

Merkle Trees and Simplified Payment Verification(SPV):

- What is

Bitcoin Forks

Hard Fork:

Soft Fork

- What is

Bitcoin Whitepaper

Bitcoin - A Peer-to-Peer Electronic Cash System:

- To learn about

Blockchain Versions

- Get in

Touch