Bitcoin and Cryptocurrency Technologies

Chapter 3: Mechanics of Bitcoin
This chapter is about the mechanics of Bitcoin. Whereas in the first two chapters, we’ve talked at a
relatively high level, now we’re going to delve into detail. We’ll look at real data structures, real
scripts, and try to learn the details and language of Bitcoin in a precise way to set up everything that
we want to talk about in the rest of this book. This chapter will be challenging because a lot of details
will be flying at you. You’ll learn the specifics and the quirks that make Bitcoin what it is.
To recap where we left off last time, the Bitcoin consensus mechanism gives us an append-only
ledger, a data structure that we can only write to. Once data is written to it, it’s there forever. There’s
a decentralized protocol for establishing consensus about the value of that ledger, and there are
miners who perform that protocol and validate transactions. Together they make sure that
transactions are well formed, that they aren’t already spent, and that the ledger and network can
function as a currency. At the same time, we assumed that a currency existed to motivate these
miners. In this chapter we’ll look at the details of how we actually build that currency, to motivate the
miners that make this whole process happen.
3.1 Bitcoin transactions
Let’s start with transactions, Bitcoin’s fundamental building block. We’re going to use a simplified
model of a ledger for the moment. Instead of blocks, let’s suppose individual transactions are added
to the ledger one at a time.
Figure 3.1​an account-based ledger
How can we build a currency on top of such a ledger? The first model you might think of, which is
actually the mental model many people have for how Bitcoin works, is that you have an
account-based system. You can add some transactions that create new coins and credit them to
somebody. And then later you can transfer them. A transaction would say something like “we’re
moving 17 coins from Alice to Bob”, and it will be signed by Alice. That’s all the information about the
75