2. Bitcoin Technology and Blockchain
2.3. Bitcoin Transactions, Mining, and Consensus Algorithms
1. Bitcoin Transactions:
Transaction Basics:
Bitcoin transactions are digital records of the transfer of bitcoins from one address to another. They consist of inputs and outputs. Inputs refer to the source of bitcoins (usually previous transactions), and outputs are the destination addresses where bitcoins are sent.
Digital Signatures:
To authorize a transaction, the sender must provide a digital signature using their private key, which corresponds to the public key associated with their Bitcoin address. This signature proves ownership and prevents unauthorized spending.
Transaction Validation:
When a user broadcasts a transaction, it is propagated across the Bitcoin network. Nodes verify the transaction's validity by checking the digital signatures and ensuring that the inputs have not been spent before (to prevent double-spending).
Transaction Fees:
Users often include transaction fees to incentivize miners to include their transactions in the next block. Transactions with higher fees are typically prioritized by miners.
2. Bitcoin Mining:
Miners:
Miners are participants in the Bitcoin network who compete to add new blocks to the blockchain. They play a critical role in transaction validation and securing the network.
Proof-of-Work (PoW):
Bitcoin uses PoW as its consensus algorithm. Miners must solve a computationally intensive mathematical puzzle, known as the PoW puzzle. The first miner to find a solution gets the right to create a new block.
Block Creation:
Miners collect a set of valid transactions into a candidate block and try to solve the PoW puzzle for that block. Once a miner finds a valid solution, they broadcast the block to the network for validation.
Reward:
The miner who successfully creates a new block is rewarded with newly created bitcoins (the block reward) and the transaction fees from the included transactions. This serves as an incentive to secure the network.
Mining Pools:
Many individual miners join mining pools to combine their computational power and share rewards. In a mining pool, participants collectively work on solving PoW puzzles and share the rewards based on their contributions.
3. Consensus Algorithms (Proof-of-Work):
Decentralized Consensus:
The Bitcoin network achieves consensus on the state of the blockchain through a decentralized process where multiple nodes (miners) independently verify and agree on transactions.
Difficulty Adjustment:
To maintain a consistent block creation rate (approximately 10 minutes per block), the Bitcoin network adjusts the difficulty of the PoW puzzle. When more computational power is added to the network, the difficulty increases, and vice versa.
Longest Chain Rule:
In the event of multiple miners finding solutions simultaneously, the network adopts the longest valid chain as the true blockchain. This principle ensures that the majority of the network's computational power determines the valid blockchain.
Security:
PoW is highly secure because altering the blockchain would require an attacker to control a majority of the network's computational power (a 51% attack). This is considered extremely costly and unlikely.
Energy Consumption:
PoW-based cryptocurrencies like Bitcoin require significant computational power and energy consumption, leading to debates about environmental concerns.
Understanding these mechanics is crucial for grasping how Bitcoin operates as a decentralized digital currency. Transactions are verified and added to the blockchain through mining, which is governed by the PoW consensus algorithm. This system ensures the security, immutability, and decentralization of the Bitcoin network.