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<figure class="wp-block-image"><img src="https://web.d.center/wp-content/uploads/2021/04/Bitcoin-TX-inputs-and-outputs@2x-1024x429.png" alt="Bitcoin transactino inputs and outputs" class="wp-image-1905"/></figure>



A Bitcoin transaction is executed by sending to the network a message signalling that the owner of a certain number of bitcoins authorises their transfer to a new owner. This message contains input and output information. 



With the exception of OP_RETURN, the outputs contain a smart contract (locking script), which conditions must be satisfied to be able to dispose of bitcoins, and a smart contract for the change. The change is a difference between the amount of bitcoins unlocked for a transaction and the amount of bitcoins to be sent to a new owner. Bitcoins sent and the change constitute two new amounts of bitcoins that can be spent. They are stored by the network for the future expenses and are called UTXO (unspent transaction outputs). The inputs of a Bitcoin transaction must allow to identify and unblock bitcoins needed for a transaction. In other words, input must identify and gather all available UTXOs to constitute no less than the amount needed, and then provide the proof of ownership of these UTXOs to unlock them (i.e. satisfy the locking script). 







<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2021/04/Bitcoin-TX-inputs-and-outputs.svg" alt="" class="wp-image-1908"/></figure></div>



Miner’s fees are subtracted from the change amount.



For example, if Alice unblocks 3 BTC for a transaction in which she wishes to send 1 BTC to Bob, this transaction will empty her account and generate two UTXOs:&nbsp;



<ul><li>Bob receives 1 BTC and </li><li>Alice receives 2 BTC back - transaction fees, i.e. 1.99995 BTC (for example), 0.00005BTC being sent to the miner</li></ul>



<h2>UTXO</h2>



UTXO are transaction outputs that represent the amount of bitcoins associated with a locking script that can be unlocked by those who own the unlocking solution (e.g keys). The UTXOs spent in one transaction will be a part of inputs of another transaction in the future.



A UTXO contains two pieces of data: the amount of bitcoins in satoshis (value) and the conditions to satisfy to spend this amount (locking script, or scriptPubKey). A locking script can be a reference to an address as well as to another type of script. Depending on a script, transaction type can be different, e.g. Pay_to_Public_Key_Hash (P2PKH) or Pay-to-script-hash (P2SH).



The balance of a wallet, which represents the amount of bitcoins that can be spent, is a sum of all UTXOs that can be linked to the addresses controlled by the wallet. It is constantly monitoring the Bitcoin network and adds to its balance the UTXOs that belong to it.



The amount of bitcoins in a UTXO is an indivisible amount of satoshis (1 sat = 1/100’000’000 BTC) that must be spent in full in the following transaction. This implies that the amount of bitcoins unblocked for a transaction is generally bigger than the amount that needs to be spent, hence the change.



<h2>Transaction inputs</h2>



The inputs gather all available UTXOs to constitute no less than the amount needed for the transaction and the information allowing to unlock them. For every UTXO used in a transaction 3 types of input data are present:



<ul><li>transaction reference (TXID) containing the UTXO to use and the output index number (vout), which identifies this UTXO within a transaction</li><li>Unlocking script (ScriptSig), usually indicating the sender’s digital signature, which allows to satisfy the UTXO’s unlocking conditions (listed in its ScriptKey)</li><li>sequence number</li></ul>



UTXO is not directly present in the inputs, so the sender’s wallet and verifying nodes must search for it within the transaction using its TXID.

Bitcoin utilise un langage de script pour les transactions. Ce langage appelé « script » est un « forth-like» utilisant une technique de pile et il sert à coder la transaction. Attention donc le mot script peut donc être le nom du langage ou alors un ensemble de lignes de code écrit dans ce langage. L’UTXO en sortie (output) de transaction possède un script de blocage des bitcoins (locking script) qui sera débloquer par un script de déblocage (unlocking script) figurant dans les entrées (inputs) d’une future transaction nécessitant l’utilisation de ces bitcoins.



Ce langage a été intentionnellement choisi « simple&nbsp;», pour fonctionner facilement sur des machines de faible puissance et surtout pour avoir un langage robuste et résistant, c’est un choix de sécurité car toute erreur ou faiblesse pourrait avoir de graves conséquences financières. Le script n’est notamment pas un langage Turing-complet (il n’a pas de fonction de boucle (loop) par exemple)). Cela évite les boucles infinies ou autres dangers résultant de fonctions complexes , l’exécution du code est prévisible et sera exécuté dans un temps imparti et de la même manière sur toutes les machines.



Le script le plus classique transférant des bitcoins d’un propriétaire à un autre s’appelle «&nbsp;Pay_to_Public_Key_Hash&nbsp;», mais bien que simple le langage script permet d’autres scripts pouvant exprimer de nombreuses variétés de conditions afférentes à la transaction.

Script

Les frais de transaction (fees) sont encaissés par le mineur qui valide le bloc contenant cette transaction. Ils récompensent le mineur pour son travail de validation et par la même de sécurisation du réseau. Cette récompense s’ajoute aux bitcoins émis et affectés au mineur lors de la création de chaque bloc. Les mineurs prennent en priorité les transactions en attente de validation ayant les fees les plus élevés.



Les frais de transaction sont exprimés en satoshis par bytes, c’est-à-dire que les frais ne dépendent pas du montant de la transaction mais de la taille des données incluses dans celle-ci. Le cout par bytes à un moment donné est une valeur dynamique dépendant notamment du nombre de transactions à valider et du prix que l’émetteur de la transaction est prêt à payer. Les wallets proposent souvent plusieurs possibilités pour les frais, bas, moyens ou hauts. Ces frais sont estimés par des algorithmes, plusieurs sites internet en proposent d’ailleurs&nbsp;: <a href="https://bitcoinfees.earn.com/">https://bitcoinfees.earn.com/</a> , <a href="https://www.buybitcoinworldwide.com/fee-calculator/">https://www.buybitcoinworldwide.com/fee-calculator/</a>.



Le fait d’avoir des frais de transaction fournit de plus une protection contres des tentatives de saturation du réseau par l’envoi de multiples transactions (anti spam/Dos measure), car l’attaquant se doit de payer des fees s’il veut que les mineurs intègrent ses transactions dans les blocs à valider.



Les frais ne figurent pas explicitement dans une transaction bitcoin, on les déduit &nbsp;par différence de la somme des entrées (inputs) et de la somme des sorties (ouputs) figurant dans la transaction.

Transaction fees

<figure class="wp-block-image"><img src="https://web.d.center/wp-content/uploads/2020/11/Bitcoin-transaction-1024x429.png" alt="" class="wp-image-1477"/></figure>



Transactions lie at the heart of Bitcoin; they enable not only a secure transfer of bitcoins, but also the inscription of arbitrary data into the <a href="https://d.center/explore/bitcoin-blockchain" class="ek-link">blockchain</a>.



Transactions are basically blockchain updates where the bitcoins are taken from one owner and assigned to another, sometimes under specific conditions.



A transaction contains inputs and outputs. Bitcoin has a particular structure without the traditional notion of “accounts”, where bitcoins ownership is tracked using transaction outputs called UTXOs. These outputs allow the wallet to retrace its balance by searching within the blockchain’s history.



The specific language used to code every transaction is called Script. It allows to securely carry out different types of transactions: from a simple bitcoin transfer to more complex transactions containing various conditions. Script also enables inserting into a transaction some arbitrary piece of information to be immortalized in the blockchain, thus making it an excellent data certification tool.



One of the key elements of the transactions is a digital signature. ECDSA - the algorithm used by Bitcoin - assures that the initiator of the transaction has their private key and thus can spend the bitcoins in question. It also allows to prove that the transaction data has not been modified along the way.



Bitcoin transactions also generate transaction fees, as an additional reward sent to miners in exchange for their work of securing Bitcoin and assuring its operations.

<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/11/Bitcoin-private-key.png" alt="" class="wp-image-1459"/></figure></div>



The private key that gives a total control over bitcoins is simply a very big number generated at random.&nbsp;



Here the notion of randomness must be taken seriously: the “random” generation must be executed in the most secure way, so that no one could reproduce it. Once generated, the private key must be protected against a theft of a loss.



Insofar as the key generation method is reliable, the key security will depend on its size, generally expressed in bits: the size of 256 bits corresponding to 2256 possibilities of key creation. Bitcoin uses 256 bits private keys, the choice coming from the order of the elliptic curve used to run Bitcoin ECDSA signature&nbsp; algorithm: 2256– 4294968273. Every number between 1 and 2256 - 4294968272 (curve order -1) can become a private key, i.e. almost all numbers of 256 bits, which is an extremely big number - it can be compared to the number of atoms in an observable universe !



<h2>How to generate your private key</h2>



The first option is to create a private key yourself, by using a simple random number generator (RNG), which exists in almost all operating systems. Although being easy, this solution is not quite recommended, since all RNGs are not conceived for cryptographic use. When it comes to the method of randomness generation, it is preferable to use a CSPRNG (cryptographically secure pseudo-random number generator), a class within RNG which takes special measures in regards to the entropy. If you do not code, you can use websites that calculate private keys; some of them even interact with users in order to assure the entropy quality, for example by asking them to move the mouse while the key is being created.



Luckily for ordinary users, there is another option - to entrust private keys generation to a <a href="https://d.center/explore/bitcoin-wallets" class="ek-link">wallet</a>. They only have to make sure about the wallet’s RNG quality.

<figure class="wp-block-image alignwide"><img src="https://web.d.center/wp-content/uploads/2020/11/Bitcoin-public-key.png" alt="" class="wp-image-1458"/></figure>



In Bitcoin, the sender’s public key helps the network to verify a transaction they initiated, and the recipient’s public key helps identify to whom the bitcoins must be sent.&nbsp;



Public key is derived from the private key through a one-way function using an elliptic curve. This function is said to be one-way, because it is impossible to find a private key from a public one, unless by testing all the possibilities. Elliptic curve order (and thus the size of a private key) in the protocol was set in such a way to make this solution inoperable. 



<h2>Public key derivation and protection</h2>







The result of a private key derivation is a point (x,y) on an elliptic curve, every coordinate of which is stored on 32 bytes, thus making a public key’s size 64 bytes. In this form the public key is said to be “non-compressed”, however it is generally used in its “compressed” form, which is a number of 33 bytes (264 bits): 32 bytes for x and 1 byte to store the sign of y. In order to find y one only has to use the elliptic curve equation used by Bitcoin : y2 = x3 + 7. Knowing x, y2 can be found, leaving two possibilities for y positive and y negative, and the added byte allows to find the correct one.



Example of a compressed public key:



035792595892f86bbff330d9929ae31468b39cb48c4c9e1328a4f79e71c5b1540c



The sign of y is given in the beginning of the key as 02 or 03.



This public key, used together with the signature created with the private key, helps the network to validate a transaction initiated by the sender. Within the transaction propagated to the network this key is transferred as a hash, which is shorter and more secure (we do not communicate our public key to the person who will send us bitcoins). In order to create this hash two hash functions are applied one after another: SHA256, which gives a number on 32 bytes (256 bits), and then RIPEMD160, which produces a number on 20 bytes (160 bits).



The final result is the Public Key Hash (PKH). This acronym is regularly found in transaction scripts, notably in the most often used Pay-To-Public-Key-Hash (P2PKH).



Example of a PKH: 607a0e928e2bf3a96d70ea0adfb094b19f75385a 



<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Public-key-derivation.svg" alt="" class="wp-image-1556"/></figure></div>



The PKH is used to send bitcoins while protecting the recipient’s public key, which is not communicated to the sender during transaction. However when the recipient is willing to send these bitcoins, he or she will have to disclose their public key, so that the network could verify the digital signature. That is why, while the private key is totally protected by the one-way derivation via an elliptic curve, it is recommended to use the public key only once, for safety and anonymity considerations. The wallets usually create a new pair of keys for every transaction.



PKH is a form in which the network uses the recipient's public key, however it is not PKH that a recipient communicates to other users, but the <a href="https://d.center/explore/bitcoin-address" class="ek-link">Bitcoin address</a>, a conversion of the PKH.

<figure class="wp-block-image"><img src="https://web.d.center/wp-content/uploads/2020/11/Bitcoin-address-1024x429.png" alt="" class="wp-image-1467"/></figure>



Derived from the recipient’s public key, Bitcoin address is used to identify them in a transaction. 



The PKH (public key hash), which normally should identify a user in a transaction, is much shorter than a public key, however it is still a very long and hardy readable string of alphanumeric characters, which can lead to mistakes while transmitting it. If a mistake is not identified, bitcoins will be sent elsewhere and thus irrevocably lost. So in order to reduce such a risk it is not a PKH which is transmitted to a recipient, but an address Bitcoin. 



Bitcoin address is a PKH conversion to a more readable form, which also contains a typing error detecting system. Unlike one-way functions, this conversion is reversible: the network converts the address to PKH in order to execute transactions. This conversion is made using a special coding system called Base58check. 



<h2>Derivating an address from a PKH </h2>



The protocol deriving an address from a PKH follows the following stages:



PKH : 607a0e928e2bf3a96d70ea0adfb094b19f75385a&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



<ul><li>1.       First a 00 is added before the PKH in order to signal that this address will be the mainnet address and not the testnet one</li></ul>







R1 = 00607a0e928e2bf3a96d70ea0adfb094b19f75385a 



<ul><li>2.    R1 is then double hashed with SHA256 and the first 4 bytes of the result (e4d1a1eaf6cbdf993e0afaa7960e35c12a8d87cd380625f9bb4f61e505e51260) added to the end of R1. These 4 bytes are called the Checksum and serve as a type error protection</li></ul>







R2 = 00607a0e928e2bf3a96d70ea0adfb094b19f75385ae4d1a1ea



<ul><li> 3.       Then the R2 is encoded with base58 and we get the address</li></ul>







R3 = Adresse = 19o865cJQ45wsjqUJRAJVJXNBVsKMgYKr1   



This encoding is reversible and one can easily switch from R2 to R3 and vice versa.&nbsp;&nbsp;&nbsp;&nbsp; 



<h2>Base58 coding </h2>



Private and public keys, as well as their hash, are coded in Hex (Hexadecimal), a coding system which uses 16 (24) characters (0123456789abcdef). However it is quite ineffective, since two characters are needed to code a byte (8 bits). 



A coding system with more characters would be more effective, hence the idea of employing the Base64 system, which contains 64 (26) characters (ABCDEFGHIJKLMNOPQRSTUVWXYZabcdefghijklmnopqrstuvwxyz 0123456789+/). In this system a character can code 6 bits. 



Base64 system would solve the addresses size problem, but not the readability. That is why the last conversion stage of Bitcoin address uses Base58 system, which contains 58 characters (123456789ABCDEFGHJKLMNPQRSTUVWXYZabcdefghijkmnopqrstuvwxyz). It is much easier to read, because some characters that could be confused were cancelled: l and I (small L and a capital i), 0 and O (zero and the capital o), as well as the special characters + and /. 



It all would be great if 58 were a power of 2, as is 16 for Hexadecimal and 64 for Base64. However this is not the case, which means that there’s the last transformation to be done, the one that utilizes euclidien division of R2 (without 00 of the beginning and transformed into decimal base) by 58, in order to get the conversion table. The first 00 are converted into 1 and added to the end of the number obtained using the table, and this number is then written backwards in order to get to the address. That is why classic Bitcoin addresses start with 1, and with Segwit adoption this 1 can be replaced by a 3, if the address is Segwit-compatible. 



<h2>Checksum </h2>



Even though the address is now shorter and more readable than the PKH, there still exists a risk of misspelling. This is where the Checksum is used: during the inverse transformation to find the PKH from the address the Checksum is taken off the end of the R2 and R2 is double hashed with SHA256. The result must have the same first 4 bytes as the Checksum, otherwise there has been an error in writing the address and the network will not validate the transaction. The probability of getting the same Checksum after having misspelled the address is lower than 1 in 4 billions!

<figure class="wp-block-image"><img src="https://web.d.center/wp-content/uploads/2020/11/Bitcoin-keys-and-addresses@3x-B-1024x429.png" alt="Blockchain and cryptocurrency in images" class="wp-image-1453"/></figure>



The only one who can dispose of their bitcoins is the one holding the corresponding keys - cryptographic tools that secure transactions. #notyourkeysnotyourmoney



Bitcoin protocol largely rests on cryptography, but contrary to what one might think, in most cases it’s not about encrypting messages, but about creating digital signatures and footprints.&nbsp;



Digital signatures allow to safely transfer bitcoins from one person to another by exploiting the properties of asymmetric cryptography, which uses a pair of keys: private and public.



<a href="https://d.center/explore/bitcoin-private-key" class="ek-link">Bitcoin private key</a> is a very big randomly generated number, which must be kept secret and whose generation must be carefully chosen for security reasons. This key gives its owner an entire possession of bitcoins and therefore must be carefully kept, for when stolen, it will allow the thief to spend bitcoins, and when lost, bitcoins will become forever inaccessible.



<a href="https://d.center/explore/bitcoin-public-key" class="ek-link">Bitcoin public key</a> is derived from the private key via one-way cryptographic function, meaning that it is impossible to find a private key from the public key. 



<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2021/03/Keys-and-addresses.svg" alt="" class="wp-image-1760"/></figure></div>



Private key allows the sender to sign a <a href="https://d.center/explore/bitcoin-transaction" class="ek-link">transaction</a>. Transaction’s content, the signature and the sender’s public key are used by the network to verify the sender’s authenticity and the integrity of data within the transaction. 



The receiver’s public key is used to identify him or her as a receiver within a transaction. For the sake of security and ease, the users do not transfer the public key as it is, but rather utilize its footprint called <a href="https://d.center/explore/bitcoin-address" class="ek-link">Bitcoin address</a>. The address is what users usually see, and it can be assimilated to an account number in a classical financial transaction. 



<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Bitcoin-Keys-and-addresses-in-a-TX-1.svg" alt="" class="wp-image-1561"/></figure></div>



In the case of Bitcoin a method called ECDSA (Elliptic Curve Digital Signature Algorithm) is used to derive public keys and sign transactions. 



The keys are generally created and managed by a <a href="https://d.center/explore/bitcoin-wallets" class="ek-link">wallet </a>- an application that connects the user to the <a href="https://d.center/explore/bitcoin-network" class="ek-link">Bitcoin network</a>.&nbsp;Private keys, public keys, addresses and wallets allow users to send and to receive bitcoins easily and safely, enjoying a total control over them in a decentralized environment.&nbsp;

Bitcoin mnemonic wallets

Bitcoin HD wallets

<figure class="wp-block-image"><img src="https://web.d.center/wp-content/uploads/2020/10/wallets72-1024x398.jpg" alt="" class="wp-image-1328"/></figure>



The wallet is an application that allows to communicate with the Bitcoin blockchain.&nbsp;



The wallet generates and manages users’ private and public keys and addresses, allowing to send and to receive bitcoins. Being connected to the <a href="https://d.center/explore/bitcoin-network" class="ek-link">Bitcoin network</a> and using the keys under its management the wallet retraces and keeps the balance of bitcoins belonging to the user. Every sending and receiving operation concerning the user’s address will be added to this balance. If a user wishes to send bitcoins, the wallet allows them to create, sign and propagate the <a href="https://d.center/explore/bitcoin-transaction" class="ek-link">transaction </a>to the network (see <a href="https://d.center/explore/bitcoin-keys-and-addresses" class="ek-link">Bitcoin keys and addresses)</a>.



A wallet does not directly contain bitcoins, but it manages the keys allowing to unblock bitcoins stored on the blockchain as transaction outputs called UTXO. The UTXOs indicate the amount of bitcoins that were transferred to a user.



There are different types of wallets that can be categorized according to different criteria.



<h2>Wallets by support</h2>







<ul><li>Desktop wallet: application installed on a computer, user owns his keys</li><li>Mobile wallet: application installed on a smartphone, user owns his keys</li><li>Web wallet (custodian): application accessible via a website, user does not own his keys (controlled by a website owner), but only website access password(s)</li><li>Hardware wallet: physical electronic device that must be connected to a computer or a phone. Users own their keys, which are stored offline (a method called cold wallet). This system of keys management is considered the most secure and is recommended for storing important amounts of crypto</li><li>Paper wallet: cold storage mechanism, user owns his keys on paper, but needs a hot wallet to interact with a blockchain</li></ul>







<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Crypto-wallets-by-interface.svg" alt="" class="wp-image-1515"/></figure></div>



<h2>Wallets by access to the Internet</h2>







<ul><li>Hot wallet: all the actions required to complete a transaction are made online. The wallet generates and stores private keys, digitally signs transactions using private keys, then broadcasts the signed transaction to the network. However, since the transaction is being signed on a computer connected to the Internet, an attacker may become privy to the private key</li><li>Cold wallet: transaction initiated online is temporarily transferred to an offline wallet (hardware or an offline software), where it is digitally signed with the private key and only then transmitted to the online network. As the private key does not come into contact with a computer connected online during the signing process, an online hacker would not be able to access the private key used for it</li></ul>







<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Crypto-wallets-by-access-to-the-Internet.svg" alt="" class="wp-image-1516"/></figure></div>



<h2>Wallets by new keys generation method</h2>







<ul><li>Non-HD wallets: each new private key is generated regardless of the previous one</li><li>HD wallets: all generated private keys are derived from the “master key”, also called the “seed”. HD stands for “hierarchical deterministic”, which is the most popular method of keys derivation</li></ul>



For being user-friendly and secure, the majority of wallets now are HD, one seed controlling all the keys. If a wallet is destroyed or lost, one can simply get a new one and provide it with the seed: the wallet will reconstruct the keys and give control over related bitcoins.



In order to facilitate the usage of the seed, which is a very big number, a special standard has been introduced. It is called mnemonic and it translates the seed into a string of 12 or 24 words, which are generated during the first HD wallet initialization.







<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Wallets-by-key-generation-method.svg" alt="" class="wp-image-1517"/></figure></div>



<h2>Wallets by the way to access the blockchain</h2>







<ul><li>Full-node client: wallets that download all the blockchain and are constantly synchronized with the network. This kind of wallet is used mostly by validators and miners and it requires important memory and bandwidth. It is also the most secure wallet, as it does not imply any third party. Transaction fees can be customizable</li><li>Lightweight client (simple-payment verification or SPV client): the wallet connects to a full node and downloads only block headers. Being faster and less demanding, it is the case for mobile wallets. Transaction fees are suggested as low, medium and high</li></ul>







<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Wallets-by-access-to-the-blockchain.svg" alt="" class="wp-image-1518"/></figure></div>



There are numerous Bitcoin wallets combining different features according to user's needs: a hardware cold wallet for more security, a hot mobile lightweight wallet for more facility, a desktop full client wallet for more reliability etc...

Bitcoin hashrate and difficulty

<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2021/04/mining-and-ecology.png" alt="bitcoin mining ecology" class="wp-image-1858"/></figure></div>



Does Bitcoin mining harm the planet ? The only way to know is to analyze the energy source it uses - dirty or green - and compare to its traditional alternative - the banking system.&nbsp;



It is true that mining necessitates great amounts of electricity. This is in part what makes <a href="https://d.center/explore/proof-of-work" class="ek-link">PoW-based</a> cryptocurrencies, such as <a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a>, so robust : electricity and hardware are the price to pay for a secure network, resistant to attacks and malicious actors.



Of course this raises ecological concerns. Is it really sustainable to spend (someone would even say waste) such huge amounts of electricity to mine coins?



Well, electricity consumption as such does not harm the planet. What does harm it is obtaining electricity from “dirty” sources: coal, oil etc. So when analyzing crypto mining's impact on the environment the first question must be&nbsp; “Where does this electricity come from ?”, followed by “What does this crypto aims at achieving?”. If a blockchain is set to replace an existing activity, it would be judicious to compare their carbon footprints to each other.



<h2>Where does mining electricity come from?&nbsp;</h2>



The world’s cheapest energy can be found near renewable sources, such as dams or wind farms. However, electricity is remarkably hard to stock and to transport, so unused energy in these places is most often simply lost. Luckily mining farms, unlike banks’ head offices, do not need to be located in city centers, so they can very well be set near a dam, enjoying cheap and green energy.



And that’s what mining farms actually do. Global Bitcoin mining is estimated to have 57.7% of renewables in its energy mix, as per the <a href="https://bitcoinminingcouncil.com/wp-content/uploads/2021/10/2021.10.19-Q3-BMC-Presentation-Materials-Final.pdf" class="ek-link">BMC report of September, 2021</a>. 



Since the exodus of miners <a href="https://d.center/posts/china-banning-bitcoin-mining" class="ek-link">from China</a> in the summer of 2021 (65% of global hashrate was produced by the Chinese miners before the ban, partly from coal plants), and consequently <a href="https://d.center/posts/crypto-miners-leaving-kazakhstan" class="ek-link">from Kazakhstan</a> in Autumn 2021 (a share of chinese miners briefly landed there, but left after it became clear that the country's energy sources - mostly coal plants - were not sufficient), the share of coal-powered mining has decreased significantly.



A lion’s share of mining farms are using hydro-power and wind energy in the US (Washington state, New York, Texas), Canada, Scandinavia, The Caucasus. The farms are also built in Iceland, a country that enjoys abundant geothermal energy, and beyond the Arctic Circle in the Russian Norilsk, where the temperatures as low as -40° C naturally cool down the equipment.



There are also situations where crypto mining can be beneficial to the environment, for example in the case of stranded gas - a byproduct of oil extraction that is quite expensive to capture and transfer, so it is often simply rejected into the atmosphere. Mining farms are being built near oil-extraction plants (some examples include Texas and North Dakota) to utilize the stranded gas to mine coins, instead of polluting the air.



For the moment global crypto mining is not carbon-neutral, but many efforts are made to make it so, with green mining companies like Iris Energy, Gryphon or MintGreen raising record fundings to develop their activity. The latter is set to not only mine green, but also to increase the energy efficiency : projects of recycling heat waste from mining into hot water and heating services are being developed, with pilot programs including a whiskey distillery and a sea salt facility in Canada.&nbsp;



<h2>What does mining help achieve?</h2>



The blockchain is a decentralized alternative to traditional organizations, and its carbon footprint should be considered as an alternative to the carbon footprint of a system it is to replace.&nbsp;



In the case of Bitcoin it is [tooltip content="fiduciary money with no intrinsic value, dependent on the government and the central bank (like dollars or euros)"] fiat money [/tooltip] and gold. 



Cambridge University has set up a <a href="https://cbeci.org/">Bitcoin Electricity Consumption Index</a> that estimates Bitcoin network power almost in real time. Its electricity consumption as of August 2021 is around 14.6 GW, which is estimated at 128 TWh of annualised consumption. More recent BMC study (September 2021)indicates the consumption of 188 TWh yearly. To put things in perspective, the energy footprint of <a href="https://www.nrdc.org/sites/default/files/home-idle-load-IP.pdf" class="ek-link">"always-on" devices</a> in American households is appr. 1375 TWh (data of 2015), 7 times that of the Bitcoin network.



There are much less studies on the ecological impact of the banking industry (like many others we just take for granted), and the proper methodology is yet to be defined. However it is already possible to see the main lines. 



A 2021 <a href="https://docsend.com/view/adwmdeeyfvqwecj2" class="ek-link">study </a>by Galaxy Digital, an asset management firm specializing in cryptocurrencies, indicates that the banking system, according to only 4 metrics (branches, servers, ATMs and card network's data centers) consumes over 263 TWh yearly. Bank offices, servers and the majority of ATMs are situated in cities and have no choice but to take their energy from the city grids, which unfortunately don’t have much renewables in their mix, thus making much of banking electricity dirty. It is also clear that the real carbon footprint of the whole banking industry is much higher when taking into account all its aspects (employees transport, whether it is private cars or private jets, cash transportation... etc).



Gold mining industry has been studied better. In addition to a desastrous impact on the environment (pollution of soils and waters with toxic chemicals, deforestation, exposure of humans to the toxic vapours...) it uses approximately 571 TWh.



So, 128 to 188 TWh consumed by Bitcoin with 58% of renewable energy vs >263 TWh consumed by banks, with mostly dirty energy and 571 TWh consumed by gold mining + pollution. All things considered, it might be somewhat presumptuous to declare Bitcoin the enemy of the planet even with those figures, and it will be even more so in the years to come, considering a strong green mining trend.



As improbable as it may sound, Bitcoin could be an environmentally-friendly alternative to fiat money. Financing green miners and developing new ways of making electricity consumption more efficient, i.e. to use the heat waste, are key steps to make Bitcoin carbon-neutral.&nbsp; Moreover, the efforts that miners deploy to find more green solutions could benefit other sectors as well. 



*article updated in May 2021

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Bitcoin consensus allows network members to agree on the next block, incentivises them to maintain the blockchain and regulates the bitcoin emission. 



All the nodes of the Bitcoin network being equal in rights, the system needs a mechanism to determine which one among them will be able to add the next block to the blockchain. This decision is important, for an ill-intentioned node could be tempted to rewrite the history and spend the bitcoins which were already spent - a threat known as double spending. 



<h2>Proof-of-Work</h2>







The consensus used by Bitcoin is called the Proof-of-Work, or <a href="https://d.center/fr/explore/proof-of-work" class="ek-link">PoW</a>. The work here consists of finding a hash of the block header, which will start with a certain number of ‘0’. The hash is obtained by applying a cryptographic function that transforms any volume of data into a fixed length’ alphanumeric result. It is also a one-way function - it is easy to hash a piece of data, but almost impossible to guess the data from its hash. 



In order to get a hash starting with a ‘0’, the nodes called miners will add to the block header a number called nonce that will change its data and therefore its hash. The more ‘0’ required, the more difficult is the work, increasing the number of different nonces that a miner would have to try to produce a PoW. 



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For a better understanding of how the PoW works we recommend <a href="https://demoblockchain.org/block">https://demoblockchain.org</a> website, which proposes an excellent tool to understand the essence of the blockchain. 



In order to be efficient, mining requires a considerable amount of electricity and specific hardware. The money that a miner spends on adding a block serves in a way like a guarantee of their honesty: they literally invest into the network's security. 



<h2>Miner’s reward</h2>







The miner who finds a PoW propagates their block to the rest of the <a href="https://d.center/fr/explore/bitcoin-network" class="ek-link">network </a>who verify it. If the block is valid, it is integrated into the blockchain and miners start working on the next block, which will carry a mention to the previous one.



As a reward for their work miners insert into a block a special type of <a href="https://d.center/fr/explore/bitcoin-transaction" class="ek-link">transaction </a>called coinbase, which generates a predefined quantity of bitcoins and attributes them to the miner’s address. It also sends to the miner the fees paid by people who initiated transactions included into this block. However, in order to be sure that the block has really been accepted, a miner has to wait 100 blocks more to pocket the reward. 



<h2>Bitcoins creation </h2>



Bitcoin protocol is set to have a block added to the blockchain every 10 minutes on average, allowing to know emission rhythm beforehand. Such monetary emission is radically different from the classic one, depending on a Central Bank’s whim, and is one of the reasons Bitcoin was created.



As the Bitcoin network grows bigger, more and more miners join the competition in order to find a block’s PoW and add it to the blockchain. Their equipment is being constantly upgraded too. In order to maintain a stable emission rhythm in spite of technological progress Bitcoin protocol reacts by increasing the PoW difficulty - the number of necessary ‘0’. 



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Bitcoin is a deflationary currency: miners’ reward is cut by half every 4 years approximately, the event known as the halving. At this rhythm the maximum bitcoins quantity will be 21’000’000 - a number which will be approached by 2140. 
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Bitcoin network discovery and routing

Bitcoin full nodes

Bitcoin SPV wallets

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Bitcoin network is based on a peer-to-peer (P2P) architecture and anyone can join it as a full node, a miner or an SPV wallet. 



A P2P network is a distributed IT network, where computers communicate directly without any central server. P2P means that computers are peers and have the same rights and functions, being both clients and servers. P2P network nodes communicate thanks to the specific program, somewhat erroneously called the “client”. The most used Bitcoin client is called Bitcoin Core. 



P2P architecture is fundamental for Bitcoin - an open network allowing anyone who has downloaded the protocol to join it and fulfill the same functions as the other members. In the absence of a central authority and with a big amount of nodes all capable of accomplishing essential tasks (and also evolving in a dynamic way) it is pretty hard to apply any censorship to the network, which makes Bitcoin a truly independent cryptoasset. 



<h2>Network nodes: full nodes, miners and SPV wallets </h2>



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The heart of the Bitcoin network is composed of full nodes - the nodes who stock the entire blockchain and are therefore capable of individually verifying transactions and blocks, in order to pass them on to the rest of the network. 



The miners and the SPV wallets connect to the full nodes. Miners need it to get the latest state of the blockchain (blocks and transactions) that will allow them to compete in finding the <a href="https://d.center/explore/proof-of-work" class="ek-link">PoW </a>and eventually submit their candidate block to the network for verification (see <a href="https://d.center/explore/bitcoin-consensus-and-mining" class="ek-link">Bitcoin consensus and mining</a>). 



SPV wallets are lightweight wallets that do not stock the entire blockchain, but only block headers, which means that they have to connect to the full nodes in order to be able to function (see <a href="https://d.center/explore/bitcoin-wallets" class="ek-link">Bitcoin wallets</a>). If they wish to, a full node can integrate a wallet feature without the help of other nodes, and a miner can have his own full node to access the blockchain. 



In order to integrate the network a new full node must contact an already active full node and download the blockchain. Once a full node joins the network, it will validate and transmit blocks and transactions. An SPV wallet also must connect to the network in order to send and receive transactions relative to the addresses it controls, but it will only download block headers (see <a href="https://d.center/explore/bitcoin-blockchain" class="ek-link">Bitcoin blockchain</a>).

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Can you cheat in Bitcoin? How do you hack an impartial system run on a worldwide network of independent peers?&nbsp;



Bitcoin is a digital money, and executing a Bitcoin transaction means transferring a digital item, i.e. something easily duplicated. However, because it is money we’re speaking about, such duplication must be avoided at all costs: while it is not at all problematic to send a photo by email and still have a copy of it on our computer, it would not make any sense for money transfer. This problem is known as double spending.



In the case of [tooltip content="fiduciary money with no intrinsic value, dependent on the government and the central bank (like dollars or euros) "] fiat money [/tooltip], the banks make sure that the amount of money sent is deduced from the account of the sender. Bitcoin protocol allows to do this without any trusted third party: the network is keeping a real-time ledger with all previous transactions and checks all incoming transactions against this ledger, thus preventing any attempt to spend the same bitcoin more than once.&nbsp;



<h2>Double spending mechanism</h2>



In theory, there is a way to double spend bitcoins, even if it is extremely difficult to execute.



Such possibility is in the hands of the miners and unfolds as follows:



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<ul><li>A miner spends bitcoins and gets something in return ( a merchandise, another cryptocurrency etc). This transaction indicates which bitcoins are being sent, or more precisely their UTXO (unspent transaction output) referenced in transaction’s input</li><li>This transaction will be confirmed as a part of the block added to the blockchain. The receiver of bitcoins sees its confirmation in their <a href="https://d.center/explore/bitcoin-wallets">wallet</a></li><li>An ill-intentioned miner starts to secretly mine another block at the same height as the one with the first transaction. This secret block contains a transaction sending the same bitcoins (referencing the same UTXO) to the miner himself</li><li>Still secretly, a miner continues to mine this new blockchain branch, adding new blocks to the one with the second transaction. As soon as the new branch, until now unknown by the network, becomes longer than the old one (more precisely it has a bigger sum of <a href="https://d.center/explore/proof-of-work" class="ek-link">PoW</a>), a miner will propagate it to the network</li><li>Upon receiving a new branch with valid blocks and a bigger sum of PoW than the actual blockchain, the network will switch to the new branch, which will effectively become the new blockchain. At this moment the bitcoins will disappear from the first transaction receiver’s wallet, despite all previous confirmations</li><li>The new blockchain does not contain the block with the first transaction, so it will appear as non-confirmed. It could be integrated into the mempool, where the miners pick new transactions to confirm, but, since the new blockchain already contains a transaction using the same bitcoins, it will be definitely rejected by the network</li><li>At the end, the receiver of the first transaction will see it disappear from the blockchain and thus will lose their bitcoins, whereas the fraudulent miner will still have their bitcoins and the goods they received in return from the first transaction.</li></ul>







Taking into consideration the methodology of the attack, a miner can execute double spending only with their own transactions.



<h2>Obstacles to a double spending</h2>



Among the main obstacles to a double spending we can name the blockchain structure itself, the number of confirmations and the absence of an economic interest.



<h3>Blockchain structure</h3>



Since every block contains a unique hash of the previous block’s header, a fraudulent miner must mine not a single block, but a whole new branch - a series of blocks linked together. In order to do so, they will not only have to find all the PoW of this branch, but to do it faster than the rest of the network - a highly ambitious task, which gets more difficult as the computational power of the network grows.&nbsp;



Theoretically, if a miner achieves more than 50% of the network’s [tooltip content="number of hash operations done per second, reflecting a miner's computational power"] hashrate [/tooltip] and is capable of maintaining it indefinitely, at one moment they will get a chain containing more work (as in PoW) than the actual chain - a situation called 51% attack. It is possible to try double spending with less than 50% of the network’s power, but the attack is much less likely to succeed.



<h3>Number of confirmations</h3>



A successful attack is useful only if an attacker receives the goods they spent their bitcoins on in the first transaction. That is why for important deals it is recommended to wait for a certain number of confirmations (blocks mined after the block containing the transaction in question) before sending the goods: if an attacker can’t gather more than 50% of the network’s power, they will not be able to mine several blocks in a row faster than the network. Indeed, the probability of a successful attack is an increasing function of an attacker’s hashrate percentage and a decreasing function of the number of confirmations needed before delivering the goods in return. In case of Bitcoin the standard number of confirmations required for serious transfers is 6.



<h3>Economic interest</h3>



Even if this kind of double spending is theoretically possible, its execution appears unlikely: from the economic standpoint the gain must be higher than the expenses. Taking into account the actual Bitcoin hashrate and thus the huge quantity of energy needed to get the half of it, this sounds quite unrealistic. An attacker would also need to buy or rent the specialist hardware to gather this computational power, which itself presents a serious logistic and financial challenge. Theoretically a collision of miners could gather the power needed for an attack, but mining being their primary occupation and means of subsistence, it is hard to imagine they would cut off the branch they're sitting on.



One can imagine a not-for-profit attack aiming at damaging the network, but once again its cost would be exorbitant, not to mention that the Bitcoin community would react and counter-attack in one way or another.

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A block is the basic element of the blockchain. A Bitcoin block is made up of 4 parts: 



<ul>
<li>the block size, </li>



<li>the header (which itself has a specific structure), </li>



<li>the number of transactions, and </li>



<li>the list of transactions.</li>
</ul>



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The block header contains particularly important information:



➡️ the version number of the protocol used to create the block



➡️ the ID (unique identifier) of the previous block (n-1), which is the hash of its header. The ID of block n will be found in the header of block n+1. The block ID is calculated by applying the SHA256 hash function twice to the header data. The only block that has no reference to the previous block is the first block created - the Genesis block. It is statically present in all Bitcoin clients from the outset, preventing its alteration and thus providing a secure basis for loading the blockchain.



➡️ the <a href="https://d.center/explore/merkle-tree" class="ek-link">Merkle root</a> is the cryptographic fingerprint of all transactions confirmed in this block (read more here).



➡️ the Timestamp is the approximate time at which the block was created.



➡️ difficulty target and Nonce are characteristics relating to mining operations, indicating the quantity of '0s' required to obtain a PoW of the block and the number used to achieve it.



In the part of the block that assembles the transactions, the first transaction is always special - it's the coinbase, the transaction by which the miner is remunerated.

A blockchain fork is often cited as a means of creating a new blockchain, or attempting a fraudulent action. In most cases, however, it's a completely trivial and unintentional event. Let's take a look at what happens on Bitcoin when the two valid blocks are released simultaneously.



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When the two valid candidate blocks that can be attached to the blockchain are propagated on the network at roughly the same time, its nodes will find themselves with two possible branches. In this case, the nodes will keep a copy of both branches and wait for the next blocks to be broadcasted before deciding which will be the valid branch.



Receiving the new blocks, the nodes reproduce the same process, searching for the parent block to the blocks proposed to them. A branch is then built that is longer than the other - the branch that will be considered the main one. More precisely, it's not the longest blockchain, but the blockchain containing the greatest amount of work (the most <a href="https://d.center/explore/bitcoin-consensus-and-mining" class="ek-link">Proof-of-Work</a>) that will be chosen, although in most cases this will correspond to the longest blockchain.



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There may also be so-called "orphan" blocks, i.e. blocks for which the node has not been able to find a parent. This usually happens when two successive blocks are created in a very short space of time, and the child bloc arrives before the parent. When the node receives the parent, things will return to normal.



<h2 class="wp-block-heading">Choosing the right chain</h2>



The amount of work in a branch is the sum of the difficulties of each block in the branch. The difficulty of a given block A is calculated by the following formula:



Difficulty of A = (target of genesis block / target of A) = ((216 - 1) * 25626)) / (target of A)



As it is the branch with the greatest amount of work that is retained, should another branch subsequently have more work than the main chain, the node will reposition itself on the new one as the main branch.



If we look at the difficulty calculation, we see that the longest chain is generally the chain with the greatest difficulty (and two chains of the same length have the same amount of work). One case where this will be different is when adjusting the difficulty with blocks produced at roughly the same time, but with different targets.



The existence of forks explains why it is prudent for the recipient of a transaction to wait for several confirmations to be certain of its validity (i.e. several blocks added after the one containing the transaction). If the branch with the block containing the transaction is not the selected branch, the transaction will disappear.



That being said, if it's a valid transaction, it will undoubtedly be found in both branches at the same block height, or in a subsequent block. The danger is greater in the case of a deliberate fraudulent fork aimed at double spending.

A Merkle root is a cryptographic method of taking a digital fingerprint of a set of data, making it possible to quickly and easily verify whether a particular piece of data is present in the set, or whether a piece of data in the set has been altered.



This technique was unveiled in 1979 by Ralph Merkle at Stanford University in a publication entitled "Certified Digital Signature", in which he described a new method of proof based on a binary hash tree, since known as the Merkle Tree. This technique has been widely used, particularly in distributed computing systems where the same set of data must be present in multiple locations. 



The technology is mentioned several times in Satoshi Nakamoto's white paper describing Bitcoin for the first time.



<h2 class="wp-block-heading">Merkle Tree structure</h2>



The Merkle Tree applies to a set of data - in the case of Bitcoin, to all the transactions in a block. The Merkle Tree is a binary tree with a piece of data at the top called the Merkle root, from which the tree divides into two, then each piece divides into two, and so on. At the base are the leaves, which are the hashes of the transactions confirmed in the block in the order corresponding to the order in which these transactions were recorded. The tree is built from the base of the leaves, which must be an even number. If this is not the case, the last transaction is copied and hashed, providing the missing data.



To build the tree, the leaves are concatenated two by two, this concatenation is hashed, and the operation is repeated until the last hash is obtained. That will be the Merkle root. Hashing is performed by using the SHA256 function two consecutive times.



Therefore, the calculation of the Merkle root depends on all the transactions confirmed in the block. Any change in these transactions, or even just in their order, will result in a change in the Merkle root.



Here's a simplifying diagram based on 16 transactions A,B,…,P. The 16 leaves forming the base of the tree are the hashes (double SHA256) ordered by the 16 transactions in the block:



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<h2 class="wp-block-heading">Advantages of the Merkle Tree</h2>



The fundamental property of the Merkle Tree is that it enables efficient verification of the integrity of block data, or of the presence of a specific transaction in that block, with a much smaller amount of data transferred than would otherwise be necessary. Many Bitcoin wallets are SPVs, or Simplified Payment Verification wallets, which rely on this property of the Merkle tree to function. They can verify whether a particular transaction is part of a given block by receiving targeted information from full-nodes, without having to load the entire blockchain and simply possessing the block headers.



<h2 class="wp-block-heading">How the Merkle Tree works</h2>



When an SPV wallet wants to verify that a transaction is part of the block for which it knows the Merkle root, it queries a full node, which will send it a Merkle path - the specific data set that will enable the SPV wallet to create a "verification path" from the transaction to the Merkle root.



In the scheme above, the SPV wallet will only need to receive 4 out of 16 data items (marked in white) to reconstruct this path. Knowing the transaction K, the wallet can calculate the hash of K, then concatenate it with the hash of L sent to it. It then hashes this concatenation, which provides it with the data it needs to continue the process with another hash sent to it. It continues this way until it reconstitutes the Merkle root, which it then compares with the one it has in memory. If the recalculated Merkle root is equal to the Merkle root it has in memory, then transaction K is indeed part of this block. By reconstructing a Merkle path, checking the presence of a transaction in a block containing N transactions simply requires access to log base 2(N) hashes of 32 bytes each, 32 bytes being the size of the hash by SHA256. Since blocks contain thousands of transactions, the use of Merkle trees drastically reduces the size of the data to be exchanged and stored for an SPV wallet.

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Bitcoin transactions are securely stored by the network, organized within a particular architecture called blockchain. 



<h2>Block structure </h2>



Transactions are gathered into blocks created by a miner approximately every 10 minutes. A block is made of a header, which contains specific data (notably the reference to the block’s content) and the <a href="https://d.center/explore/bitcoin-transaction" class="ek-link">transactions</a><a href="https://d.center/explore/bitcoin-transaction" class="ek-link"> </a>confirmed within the block. Every block contains a reference to the previous block in the form of its header’s [tooltip content=" fixed-length result of applying mathematical hash function to any volume of data. Hash is a one-way function: it is easy to get the result (also called hash) from the data, but impossible to get the data from the hash"] hash [/tooltip] - its unique identifier. The blocks always carrying a reference to the previous ones, a chain of blocks is formed. 



The first block ever created is called the Genesis block, i.e. block 0. The block 1 was created with the reference to the block 0, and so on. Block number is also called the block height (as if the blocks were built one above the other) and measures the distance to the Genesis block. The block n, whose header hash is mentioned in the header of the block n+1, is called the parent block, whereas the block n+1 is called the child block. 



<div class="wp-block-image"><figure class="aligncenter"><img src="https://web.d.center/wp-content/uploads/2020/12/Bitcoin-blockchain.svg" alt="" class="wp-image-1546"/></figure></div>



<h2>Forks </h2>



While a block can have only one parent, it could have several children - a temporary situation that appears when several miners simultaneously propose a new block to the network. This situation is called a fork, because the blockchain splits into several valid branches. 



In the majority of cases the forks are not intentional, but rather due to the nature of the consensus. It is theoretically possible though to create them intentionally in order to try and fraud the system and execute a double spending (even if such endeavour would require more than 51% of the network computational power). 



Some estimate that a 10 minutes interval between blocks is a compromise between the scalability (theoretical number of possible transactions per second) and the probability to have a fork. The shorter the block creation time, the more nodes have a chance to find themselves with candidate blocks at the same time. In the case of Bitcoin it is quite rare that a fork holds for more than two blocks. 



In order to secure the blockchain the miners have to find a <a href="https://d.center/explore/proof-of-work" class="ek-link">Proof of Work</a> before submitting a block to the network. The PoW process is such that anyone willing to rewrite the history and modify the data within the block n must redo the PoW of this block and of all others that follow, since they will contain references to the previous blocks. Such electricity spending cannot possibly be cost-effective. It is thus considered that beyond n+5 (the 5th confirmed block after n), the n  becomes near definitive. 



<h2>Merkle root</h2>



 The <a href="https://d.center/explore/bitcoin-wallets" class="ek-link">wallets </a>refer to the data within the blockchain in order to keep their balances and to initialize transactions. Therefore they have to maintain a copy of the whole blockchain at any moment. Full node wallets keep the entire blockchain, which makes them reliable, but also quite heavy and cumbersome. There is also another way of accessing the blockchain without downloading all of it - by using a piece of data called the Merkle root. This data sits within the header of every block and enables the usage of the so-called SVP wallets (SPV for Simplified Payment Verification). These wallets only download block headers, which makes them lighter and more user-friendly, however they have to connect to a full node wallet in order to function properly (see <a href="https://d.center/explore/bitcoin-network" class="ek-link">Bitcoin network</a>).

Bitcoinnn

Blockchain in use

Philosophy behind blockchain

Underlying technologies

Blockchain trilemma

Blockchain and DLT types

Bitcoin mechanism

Bitcoin Transaction

Bitcoin transaction inputs and outputs

Bitcoin implementations

UTXO

Mainchain functions

Transaction inputs

Sidechain solutions

Cryptography

Transaction Fees

Keys and addresses

Private key

Public key

Adress

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Blockchain is a recent invention. It is still in early stages of its development, and yet a burgeoning new blockchain-related industry is already emerging. Improving the technology, finding new use cases, developing the ecosystem… and of course looking to change the world are some of these new endeavors.



This section is dedicated to exploring different facets of the blockchain and bringing answers to an array of questions one might have - from “Why do we need it” to “How does it work” or “What is it used for”. The structure of Explore descending from general concepts to specific notions, you are welcome to choose your own path according to your interests and go down the rabbit hole. 



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<h2><a href="https://d.center/explore/blockchain-philosophy" class="ek-link">Blockchain philosophy</a></h2>



Why are crypto enthusiasts so enthusiastic? Blockchain is not a trivial technology, but the one that has a potential to change the very way our societies operate. Every organization and every community rely on trusted third parties, responsible for storing and managing data, with all the related risks . Replacing these trusted third parties with a decentralized data handling mechanism would eliminate much of the system’s deficiencies, and that’s exactly what blockchain does. 



<h2><a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a></h2>



The very first implementation of the blockchain, Bitcoin was created to solve the deficiencies of the monetary system and replace the so-called fiat money (dependent on Central Banks) with cryptocurrency, a completely independent alternative that runs on a decentralized peer-to-peer network.&nbsp; 



<h2><a href="https://d.center/explore/blockchain-fundamentals" class="ek-link">Blockchain fundamentals</a></h2>



A blockchain is a collection of technologies and methods that allow gathering data into a ledger, which is stored and updated by the network’s participants (which anyone can become). Data handling is its main role, although it also allows embedding more complex programs and running them in a decentralized way.&nbsp; 



<h2><a href="https://d.center/explore/blockchain-in-practice" class="ek-link">Blockchain in practice</a></h2>



Most blockchain encounters today are about cryptocurrencies - Bitcoin and many others that have appeared since. However the understanding of the technology becoming increasingly subtle, other blockchain real-world use cases appear, notably with the development of decentralized applications, or Dapps. A developed ecosystem makes these functionalities readily available and opens up previously restricted-access industries, such as finance.&nbsp;&nbsp; 



<h2><a href="https://d.center/explore/crypto-regulation" class="ek-link">Crypto regulation</a></h2>



Blockchain and its products are becoming an increasingly important part of our lives and our economies, which inevitably attracts the regulators’ attention. This is not a bad thing, though, for the right laws can support the technology and protect its users against related scams. Depending on a country however the attitude varies greatly, from progressive to autocratic. 



<h2>Beginner’s path </h2>



If you do not yet have a clear idea of what it is you would like to explore, let us suggest you a suite of 8 articles that will smoothly introduce you to the world of cryptoassets and Bitcoin in particular: it will help you to understand what it is used for, how it works and some necessary tools allowing to buy some of it.



<a href="https://d.center/explore/blockchain-philosophy" class="ek-link">Blockchain philosophy</a>



<a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a>



<a href="https://d.center/explore/how-does-bitcoin-work" class="ek-link">How does Bitcoin work</a>



<a href="https://d.center/explore/bitcoin-mechanism " class="ek-link">Bitcoin mechanism</a>



<a href="https://d.center/explore/blockchain-in-practice" class="ek-link">Blockchain in practice</a>



<a href="https://d.center/explore/blockhain-ecosystem" class="ek-link">Blockchain ecosystem</a>



<a href="https://d.center/explore/crypto-wallets" class="ek-link">Crypto wallets</a>



<a href="https://d.center/explore/crypto-exchanges " class="ek-link">Crypto exchanges</a>

What is Bitcoin and why it could be a valuable alternative to our usual currencies such as dollars and euros?



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<h2 class="wp-block-heading">Bitcoin and bitcoin</h2>



Bitcoin is both the blockchain and the cryptocurrency that exists on it. To distinguish the two, Bitcoin as the blockchain is usually written with a capital B. 



The basis of the technology were first outlined in Satoshi Nakamoto's (pseudonyme) <a href="https://d.center/en/explore/bitcoin-a-peer-to-peer-electronic-cash-system" class="ek-link">White Paper</a> published in 2008 and titled "A Peer-to-Peer Electronic Cash System". 



It was not the first try to create a digital currency, but it was the first to succeed in solving all the intricate problems that led to previous attempts’ failures. Satoshi Nakamoto exploited decades of research, in particular in the fields of cryptography and distributed systems, and brilliantly brought them together to create a fast, secure, independent, and borderless digital money.



<h3 class="wp-block-heading">Bitcoin consists of:</h3>



<ul>
<li>Bitcoin protocol - a set of rules and algorithms that enable bitcoin issuance and transactions validation via&nbsp;network consensus (a way to ensure that network participants are well-intentioned and will update transactions ledger fairly; Bitcoin consensus is called a <a href="https://d.center/explore/proof-of-work" class="ek-link">Proof-of-Work</a>)</li>



<li>decentralized <a href="https://d.center/explore/p2p-network" class="ek-link">peer-to-peer network</a><a href="https://d.center/explore/p2p-network" class="ek-link"> </a>to run the Bitcoin protocol. Without any central server, a P2P network is composed of computers with equal rights that verify transactions and, if they wish, participate in bitcoin issuance and transactions’ recording.</li>
</ul>



Running the Bitcoin protocol results in a public distributed ledger called the blockchain, where all the transactions are stored. Everyone can consult the blockchain and its transactions from the Genesis block up to now.



Bitcoins are issued according to the protocol as a reward for maintaining the network, and their transfer is carried out&nbsp; without intermediaries and centralized authorities. This means that, unlike [tooltip content=" fiduciary money with no intrinsic value backed by and dependent on the government (e.g. dollars or euros) "] fiat [/tooltip] currencies, Bitcoin does not depend on the government or banks to issue money or to settle and validate transactions. 



The only thing that gives control over bitcoins is the private key associated with every Bitcoin address and available exlusively to its owner.



<h2 class="wp-block-heading">Bitcoin alternative to fiat money</h2>



Store of value. No single entity could ever change Bitcoin code: it is stored and run on the network nodes - literally thousands of independent computers all over the world. This ensures that the code is law, and the rules embedded into code won’t change unless the majority of the network decides so. 



This stability is particularly important when it comes to the emission rules: bitcoin emission rate is predefined, with the supply divided by two every 4 years, meaning that there won’t ever be more than 21 million bitcoins. In the world where Central Banks can print as much fiat money as they wish, Bitcoin represents a remarkable store of value.



Free use. Bitcoin is also public and open source, allowing anyone to join, participate or use it. Anyone can open a Bitcoin wallet and send/receive bitcoins, without any approval from whatever organization. 



This is a significant improvement compared to the red tape of the banking system, not to mention a precious access to the world's finance for the unbanked. Furthermore, in the authoritarian countries where access to money is often used as a tool of repression, Bitcoin’s accessibility is vital. 



<h2 class="wp-block-heading">Bitcoin updates and developments</h2>



The rules that define Bitcoin protocol were first introduced by Satoshi Nakamoto, but as every computer program, they have to be regularly revised and updated, in order to reinforce the protocol security and introduce new functionalities. The way such updates are agreed upon is usually referred to as the <a href="https://d.center/explore/bitcoin-governance" class="ek-link">governance</a>, and in Bitcoin case its community plays a critical role.&nbsp;



Beyond the Bitcoin protocol itself, there have been numerous developments of the so-called layer 2, allowing&nbsp; to execute transactions off the mainchain. Such solutions usually aim to improve Bitcoin’s performance or introduce new functionalities.



Bitcoin's most popular layer-2 solution is Lightning Network, which increases dramatically its transaciton throughput and decreases network fees.

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Bitcoin is an assembly of&nbsp; technologies and principles that interact in a predefined manner, securing the whole system performance.&nbsp;So how does it work? 



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<a href="https://d.center/explore/keys-and-addresses" class="ek-link">Keys and addresses</a>. Bitcoin is a decentralized system without any trusted third party, which means that no one can dispose of coins except for their rightful owner. Such feature necessitates extensive security measures, and Bitcoin ensures them using a system of cryptographic keys and addresses. 



<a href="https://d.center/explore/bitcoin-wallets" class="ek-link">Wallets</a><a href="https://d.center/explore/bitcoin-wallets" class="ek-link"> </a>are programs capable of communicating with the Bitcoin network. They generate keys and addresses that allow sending and receiving bitcoins, and can reconstitute the bitcoin balance of a particular account by researching the blockchain. 



<a href="https://d.center/explore/bitcoin-transaction" class="ek-link">Transactions </a>are generated and sent by wallets. Bitcoin transactions have a simple structure called UTXO, and a limited coding language script, which ensure the system’s robustness. 



<a href="https://d.center/explore/bitcoin-network" class="ek-link">Bitcoin network</a> enjoys a Peer-to-Peer, or <a href="https://d.center/explore/p2p-network" class="ek-link">P2P</a>, architecture - its nodes communicate with each other without any central server. Network nodes run Bitcoin protocol to verify if a transaction is valid (the sender has enough coins on their account and their signatures are correct) and if a candidate block (set of confirmed transactions) sent by a miner is OK, then propagate them to the network. 



<a href="https://d.center/explore/bitcoin-consensus-and-mining" class="ek-link">Consensus </a>is needed in order to determine which node will add the next block to the blockchain and to guarantee that this block is not fraudulent. Bitcoin utilizes <a href="https://d.center/explore/proof-of-work" class="ek-link">Proof-of-Work</a> consensus, where nodes need to find a solution to a cryptographic problem, which necessitates a big amount of electricity and specific equipment. As a reward for such work a node gets to add a block and receives newly created bitcoins. Such “bitcoin extraction” activity is called mining and the nodes engaging in it - miners. Mining is the only way to create new bitcoins.



 The node who finds a PoW solution first broadcasts a new block to the network, where, if the block is validated by the network, other nodes start working on the following blocks. Each block having a cryptographic reference to the previous one, a <a href="https://d.center/explore/bitcoin-blockchain" class="ek-link">blockchain </a>is being formed.