How a Bitcoin Transaction Actually Works

An anonymous reader writes "Michael Nielsen has written a detailed article describing the nuts and bolts of a Bitcoin transaction. He builds the concepts from the ground up, starting with a basic, no-frills digital currency. He then examines it for flaws and tweaks the currency to patch up areas where we run into technical or security problems. Eventually, he ends up with Bitcoin, and explains how a transaction works. It's an interesting, technical read; much more in-depth than any explanation I've heard. Here's a brief snippet from a walkthrough of the transaction data: 'One thing to note about the input is that there's nothing explicitly specifying how many bitcoins from the previous transaction should be spent in this transaction. In fact, all the bitcoins from the n=0th output of the previous transaction are spent. So, for example, if the n=0th output of the earlier transaction was 2 bitcoins, then 2 bitcoins will be spent in this transaction. This seems like an inconvenient restriction – like trying to buy bread with a 20 dollar note, and not being able to break the note down. The solution, of course, is to have a mechanism for providing change. This can be done using transactions with multiple inputs and outputs...'" Bitcoin is going through another period of heavy fluctuation: it fell from a high of around $1,200 per bitcoin to roughly half that, and as of this writing trades around $760 per bitcoin.

Comments

Re:Lets get out all of the bitching before it star

[Holi]

Who is Satoshi Nakamoto? I think that might be the big one. Remember he/they own almost 3/4's of all the bitcoins mined
This one individual or group has the power to crash the entire bitcoin economy if so desired.

Explains how to manipulate Bitcoin too

[globaljustin]

This is a great article. It combines about 30 pages of info that I had to scan to learn it down to one.

It also explains how to manipulate Bitcoin mining to guarantee you mine the next block. It's in the section on what happens when two miners have the next block in the blockchain ready at the same time:

Occasionally, a fork will appear in the block chain. This can happen, for instance, if by chance two miners happen to validate a block of transactions near-simultaneously – both broadcast their newly-validated block out to the network, and some people update their block chain one way, and others update their block chain the other way:

This causes exactly the problem we’re trying to avoid – **it’s no longer clear in what order transactions have occurred, and it may not be clear who owns which infocoins.** Fortunately, there’s a simple idea that can be used to remove any forks. The rule is this: if a fork occurs, people on the network keep track of both forks. But at any given time, miners only work to extend whichever fork is longest in their copy of the block chain.

Suppose, for example, that we have a fork in which some miners receive block A first, and some miners receive block B first. Those miners who receive block A first will continue mining along that fork, while the others will mine along fork B. Let’s suppose that the miners working on fork B are the next to successfully mine a block:

**After they receive news that this has happened, the miners working on fork A will notice that fork B is now longer, and will switch to working on that fork.**

And the miners on fork B get paid their 20 BTC for mining the next block!

Presto, in short order work on fork A will cease, and everyone will be working on the same linear chain, and block A can be ignored. Of course, any still-pending transactions in A will still be pending in the queues of the miners working on fork B, and so all transactions will eventually be validated.

Presto indeed!

If you set up inside a city fiber ring and made BTC exchanges and *also* mined BTC blockschain solutions you could game out the transactions and network traffic so that **your BTC** solution was always the first available to the network because it is the closest geographically and by network topology!

If there's a tie, you have the next solution ready to break the tie and get the BTC reward!!!!

There you have it...it's a money machine...well a BTC machine ;)