Fundamentals and Design Principles of Blockchain Technology

Bitcoin's network is a decentralized peer-to-peer system where miners maintain transaction records through "mining," ensuring network stability.

Blockchain provides a publicly visible ledger that records historical transaction data rather than account balances. This design prevents replay attacks—where legitimate transactions are maliciously rebroadcast multiple times.

Core Transaction Process

Bitcoin eliminates traditional accounts. Users write transactions to the network ledger, awaiting confirmation for completion.

Key Components:

• Inputs & Outputs: Transactions reference Unspent Transaction Outputs (UTXOs) as inputs, creating new UTXOs for recipients. Spent outputs (STXOs) become invalid for reuse.

• Validation: Signatures prove UTXO ownership. Each transaction must meet:

  • Input sum ≥ Output sum (excess becomes miner fees).
  • Minimum fee: 0.0001 BTC (higher fees prioritize processing).
• Smallest Unit: 1 Satoshi = 10⁻⁸ BTC.

Example: Alice references her UTXO (from a prior transaction) to pay Bob, generating a new UTXO under Bob's control.

⚠️ Note: Transactions gain reliability with each new block confirmation, reducing reversal risk.

Key Concepts

Addresses

• Derived from hashed public keys (SHA256 + RIPEMD160 = 160-bit hash).
• Encoded via Base58Check for readability (e.g., 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa).
• Security: Hashing prevents private-key exposure from public keys.

Transactions

Contains:

1. Sender/recipient addresses.
2. Digital signatures.
3. Source UTXO IDs.
4. Amounts and timestamps.

Validation Checks:

• Legitimacy (valid addresses, UTXO status).
• No double-spending.
• Input ≥ Output.

Scripts

• Purpose: Validate transactions without hardcoding rules.

• Types:

  • scriptSig (unlocking): Proves ownership (signature + public key).
  • scriptPubKey (locking): Sets spending conditions (e.g., pay-to-pubkey-hash).

P2PKH Example:

scriptSig: <sig> <pubKey>
scriptPubKey: OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG

Execution: Stack processes concatenated scripts to verify signatures.

Blocks

• Structure:

  • Header (80 bytes): Previous block hash, Merkle root, timestamp, nonce.
  • Transactions: Ordered Merkle tree leaves.
• Size Limit: 1 MB per block (scalability challenge).

Innovative Design

Anti-Fraud Economics

• PoW Cost: Miners risk sunk costs (electricity/hardware). Attack ROI diminishes as honest miners dominate.

Negative Feedback

• Self-Regulation: More miners → Higher security → Increased BTC value → Lower individual rewards (and vice versa).

Probabilistic Consensus

• Gradual Finality: Confirmations deepen over time (exponentially reducing reversal odds).
• Block-Based: Batched transactions for efficiency in open networks.

FAQs

Why does Bitcoin use UTXOs?

UTXOs prevent double-spending by tracking unused outputs explicitly, unlike account-based models.

How are transaction fees determined?

Market-driven: Users compete for block space. Miners prioritize higher fees.

What’s the role of nonces in mining?

Nonces vary PoW hash outputs until meeting difficulty targets (e.g., leading zeros).

👉 Explore Bitcoin’s whitepaper for deeper technical insights.

👉 Compare PoW vs. PoS consensus to understand alternatives.

Summary: Bitcoin’s design merges cryptography, game theory, and distributed systems to achieve trustless consensus—a blueprint for decentralized finance.