When a payment network has no trusted bank or fixed membership, participants still need a shared record and a way to resist fraud. Bitcoin makes that record public and lets anyone help maintain it through cryptography and proof of work. section 12.0 section 12.1.3
Bitcoin is a decentralized digital currency and peer-to-peer payment network. Users run compatible software, hold ECDSA key pairs, sign transactions, and rely on a shared append-only ledger rather than a central authority. section 12.2 section 12.2.1 section 12.2.2
Bitcoin’s main components fit together as follows:
- Represent balances as unspent transaction outputs, or UTXOs, associated with public keys. section 12.2.1
- Authorize spending by signing a transaction with the corresponding private key; transaction scripts determine how outputs can be spent. section 12.2.1
- Broadcast transactions across interconnected nodes so miners can receive and include them in blocks. section 12.2.2
- Use proof of work to let an open set of miners propose the next block and reduce Sybil attacks. section 12.1.3 section 12.2.3
- Resolve competing histories by adjusting mining difficulty and following the chain with the most accumulated work. section 12.2.3
A Bitcoin block links to its predecessor, making the ledger append-only: changing old data changes its digest and breaks later links. Public visibility provides transparency, but identifying real people behind public keys may remain difficult. section 12.2.2
A payment with change
Alice signs a transaction sending 1 BTC to Bob while spending a 5-BTC UTXO. The transaction returns change to Alice and reserves part of the difference as a fee; Bob later combines UTXOs to pay Felix. section 12.2.1
Mining a competing block
If two miners publish valid blocks at the same height, a later block extending one branch makes that branch the one miners continue to extend because it contains more work. section 12.2.3
Figure 12.1 A centralized network can be seen as a single point of failure, whereas a distributed and decentralized network are resilient to a number of servers shutting down or acting maliciously. A permissioned network has a known and fixed set of main actors, while in a permissionless network, anyone can participate.
Compare centralized, distributed, decentralized, permissioned, and permissionless network arrangements before examining Bitcoin’s consensus model. section 12.1.3
Bitcoin’s tradeoffs are practical: private-key loss or theft can destroy access to funds, proof-of-work mining consumes substantial electricity, and the currency can be highly volatile. section 12.2.1 section 12.3.5 section 12.2
