Satoshi Notebook | How Bitcoin Works

How Bitcoin Works

bitcoin is a decentralized network of computers running identical software, maintaining synchronized copies of a shared ledger through cryptographic proof and economic incentives.

Network Architecture

bitcoin operates as a peer-to-peer network with specific roles:

       • nodes: maintain and verify the complete blockchain

       • miners: process transactions and create new blocks

       • wallets: manage keys and create transactions

       • each participant enforces network rules independently

       • no central authority or control point

The Blockchain

all bitcoin transactions are recorded in a chain of cryptographically linked blocks:

       • each block contains a batch of transactions

       • blocks are cryptographically linked to previous blocks

       • average block time is 10 minutes

       • difficulty adjusts every 2016 blocks

       • entire history is maintained by all full nodes

Transactions

bitcoin transactions are cryptographic structures:

       • inputs reference previous transaction outputs

       • outputs specify amounts and conditions

       • digital signatures prove ownership

       • script system enables programmable conditions

       • UTXO model prevents double-spending

Mining Process

miners secure the network through proof-of-work:

       • collect pending transactions from mempool

       • construct candidate block meeting all rules

       • compute proof-of-work by iterating nonce

       • broadcast valid blocks to network

       • receive block reward and transaction fees

Cryptographic Foundations

bitcoin relies on several cryptographic primitives:

       • SHA-256: secure hashing algorithm

       • ECDSA: digital signature scheme

       • Merkle Trees: efficient transaction verification

       • Public Key Cryptography: address generation

       • Hash Functions: proof-of-work mining

Network Consensus

nodes maintain consensus through specific rules:

       • validate all transactions and blocks

       • reject any invalid data

       • follow longest valid chain

       • propagate valid transactions and blocks

       • maintain mempool of pending transactions

Economic Incentives

the system aligns incentives for all participants:

       • miners profit from honest block creation

       • nodes benefit from network security

       • users gain monetary sovereignty

       • developers enhance network value

       • attackers face prohibitive costs

Scripting System

bitcoin includes a simple but powerful scripting language:

       • stack-based execution model

       • supports multiple signature schemes

       • enables time-locked transactions

       • allows conditional payments

       • facilitates payment channels

Network Propagation

information flows through the network efficiently:

       • transactions broadcast to all nodes

       • compact block relay reduces bandwidth

       • peer discovery ensures connectivity

       • DOS protection limits resource usage

       • mempool manages pending transactions

Security Model

bitcoin achieves security through multiple mechanisms:

cryptographic proof makes transactions irreversible, economic incentives make honesty profitable, network consensus makes rules immutable, and proof-of-work makes attacks costly. this combination creates a system that is both theoretically sound and practically secure.