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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.

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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.

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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). 







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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.