Bitcoin operates on a fundamentally different model than traditional banking systems. Instead of relying on account balances, it uses a system of unspent transaction outputs (UTXOs) and a scripting language to manage transactions. This design ensures security, prevents double-spending, and enables programmable money.
The Foundation: UTXOs as Building Blocks
In Satoshi Nakamoto's whitepaper, Bitcoin is defined as a chain of digital signatures. The owner of coins signs a digital signature that combines the previous transaction and the next owner's public key, attaching this signature to the transaction. The recipient verifies the signature to confirm the sender's ownership of the chain.
This system solves the double-spending problem without a central authority. Instead of relying on banks, Bitcoin公开izes all transactions. Participants in the network agree on a single history of transactions, and recipients ensure that most nodes recognize their transaction as the first occurrence.
Unlike traditional systems that use account-based ledgers, Bitcoin avoids this approach for efficiency reasons. Checking entire transaction histories for every new transfer would be slow and cumbersome as the network grows. Instead, Bitcoin uses UTXOs.
What Is a UTXO?
UTXO stands for Unspent Transaction Output. It represents a discrete chunk of Bitcoin that hasn't been spent yet. Every Bitcoin transaction creates new UTXOs and consumes existing ones. The entire network maintains a set of all UTXOs, which allows nodes to quickly validate new transactions without reprocessing the entire blockchain.
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How Bitcoin Transactions Work
A Bitcoin transaction isn't a simple handoff of funds. Instead, it's a structured data transfer that can include multiple inputs and outputs. This design makes it easy to combine and divide value.
Transaction Structure
Each transaction contains several key fields:
- Version: The rules this transaction follows.
- Input count: How many inputs are included.
- Input list: References to UTXOs being spent.
- Output count: How many outputs are created.
- Output list: New UTXOs generated.
- Lock time: When the transaction becomes valid.
Inputs identify the sender by referencing previous UTXOs. Outputs specify recipients and any change returned to the sender. The transaction fee is the difference between the total inputs and total outputs.
Types of Inputs and Outputs
There are three primary transaction input types:
- Standard TxIn: Regular spending of a UTXO.
- Spend Coinbase TxOut: Spending block reward coins.
- Coinbase/Generation: Creating new coins through mining.
Outputs come in two main forms:
- Standard TxOut: Regular payment to a script.
- Coinbase TxOut: Special output for miner rewards.
The Power of Bitcoin Script
Every transaction output doesn't point directly to an address but to a script. This script defines the conditions that must be met to spend the UTXO. This system makes Bitcoin programmable money.
Locking and Unlocking Scripts
Transaction validation relies on two script types:
- Locking Script: Defines spending conditions, placed on outputs.
- Unlocking Script: Provides solutions to meet those conditions, placed on inputs.
Only when the unlocking script satisfies the locking script can the funds be spent. This mechanism uses a simple stack-based programming language with operations like OP_DUP, OP_HASH160, and OP_CHECKSIG.
Common Script Types
Two script formats dominate Bitcoin transactions:
- P2PKH (Pay-to-Public-Key-Hash): Requires spending with the private key matching the public key hash (address). This is the most common transaction type.
- P2SH (Pay-to-Script-Hash): Requires meeting conditions defined in a script hash. This enables features like multi-signature wallets requiring multiple signatures to spend funds.
Example P2PKH script:
Pubkey script: OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG
Signature script: <sig> <pubKey>Example P2SH script:
Pubkey script: OP_HASH160 <scriptHash> OP_EQUAL
Signature script: <sig> [sig...] <redeemScript>The Bigger Picture: Programmability and Beyond
Bitcoin's scripting language is intentionally limited for security reasons. It's not Turing-complete, meaning it can't run arbitrary complex programs. However, it provides a foundation for blockchain programmability.
This script system serves as an expansion interface for blockchain technology. It enables basic smart contracts and lays the groundwork for more complex applications. Other platforms like Ethereum have built upon this concept, creating more powerful scripting capabilities while maintaining the core UTXO model in various forms.
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Frequently Asked Questions
What exactly is a UTXO?
A UTXO (Unspent Transaction Output) represents a specific amount of Bitcoin that hasn't been spent yet. Think of it like digital cash - each UTXO is like a bill of certain value that can be spent in future transactions. The entire Bitcoin network tracks all UTXOs to validate new transactions quickly.
How does Bitcoin prevent double-spending without banks?
Instead of relying on central authorities, Bitcoin uses public verification. All transactions are broadcast to the network, and nodes maintain a consensus on which UTXOs have been spent. miners include valid transactions in blocks, and once confirmed, spending the same UTXO again becomes practically impossible.
What's the difference between account-based and UTXO models?
Account-based systems (like traditional banking) track balances in accounts. The UTXO model tracks individual pieces of value (UTXOs) that move between owners. UTXOs offer better privacy and parallel transaction processing but can be more complex to manage.
Can Bitcoin scripts create smart contracts?
Yes, but with limitations. Bitcoin scripts can create basic contracts like multi-signature wallets, time-locked transactions, and simple conditional payments. However, the language isn't Turing-complete, so complex contracts aren't possible like on Ethereum.
Why doesn't Bitcoin use account balances instead of UTXOs?
UTXOs provide better scalability and privacy. Validating transactions requires only checking that inputs are unspent UTXOs, not processing entire account histories. This makes verification faster and more efficient as the network grows.
How do transaction fees work in the UTXO model?
Fees are the difference between the total value of input UTXOs and output UTXOs. If you spend 1 Bitcoin from a UTXO but only send 0.9 Bitcoin to someone, the remaining 0.1 Bitcoin can be returned as change (minus a small fee taken by miners).