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.