The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them

by Antony Lewis

Transactions are payment instructions of specific amounts of Bitcoin (UTXOs) from one user-generated account (address) to another. The transactions are created using wallet software, authenticated with unique digital signatures, then sent to bookkeepers (nodes) who individually validate them according to some well-known business and technical rules. The bookkeepers then add valid transactions to their mempool and distribute them to other bookkeepers that they are connected to. Miners gather these individual transactions into blocks and compete with each other to mine their blocks by tweaking the block contents, specifically the nonce field, until the hash of the block is smaller than some target number. The target number is based on the difficulty setting at the time, which is derived from the time taken to mine the previous set of blocks to achieve a network-wide target frequency of one new mined block every 10 minutes. Miners receive a financial incentive in the form of new BTC and transaction fees which they may credit themselves, to compensate for spending resources to perform the competitive, repetitive hashing needed to create valid blocks. The blocks link to each other in a unique sequence to form a ledger, the Bitcoin blockchain, that is recorded identically almost simultaneously on thousands of computers around the world that run Bitcoin software. If a Bitcoin transaction is not recorded on this blockchain, it is not a Bitcoin transaction. It doesn’t exist. A Bitc...