Main content
Finance and capital markets
Course: Finance and capital markets > Unit 8
Lesson 8: Bitcoin- Bitcoin: What is it?
- Bitcoin: Overview
- Bitcoin: Cryptographic hash functions
- Bitcoin: Digital signatures
- Bitcoin: Transaction records
- Bitcoin: Proof of work
- Bitcoin: Transaction block chains
- Bitcoin: The money supply
- Bitcoin: The security of transaction block chains
© 2023 Khan AcademyTerms of usePrivacy PolicyCookie Notice
Bitcoin: Transaction block chains
The mechanics of a bitcoin transaction block chain, which is a construct that is generated by bitcoin miners and functions as a global ledger for recording and validating bitcoins. Created by Zulfikar Ramzan.
Want to join the conversation?
- At, when breaking a tie between 2 proofs of work, the video says that the transaction chain which wins has the "highest aggregated difficulty associated with that underlying proof-of-work protocol in each of the transaction blocks." But how do you estimate this aggregated difficulty in practice? Can we have more details on that? Thanks! 10:40(21 votes)
- That's correct. The smaller the prefix of zeros, the lower the difficulty of solving the puzzle. The way that the proof of work is described in the actual bitcoin documentation is that there is a target value and any hash output smaller than the target satisfies the criteria. It might be possible that the output will have an even larger prefix of zeros compared to the target (it would still satisfy the criteria, though).(20 votes)
- Great series! Could you please expand this part with explanation on how do individual transactions get into a block in relation to the assigned fees? As far as I know there is a relationship between a transaction fee and a place of that transaction in a queue for inclusion in the next block. Understanding this process would give answer to why there should be a fee assigned to a transaction or what are the consequences of not assigning a fee.
Thanks
Marian(10 votes)- Miners choose what transactions to include in a block. If there is no fee, they have no reason to put the the transaction in the block, so they will probably just throw it away.
They higher fee you give, the more a miner will want to put it in a block, so it will likely be confirmed faster.(19 votes)
- This video seems to have a major flaw. If the block chain only stored the hashes then you wouldn't have any accessible information, hashes are irreversible. The block chain needs to maintain the public ledger in a readable format. How is this done.(15 votes)
- The blocks are still readable. It doesn't only store the hashes. The block also says what transactions are incorporated and where in the tree structure each transaction is.(4 votes)
- I am having trouble wrapping my head around the proof of work. What purpose does this serve? Wouldn't the system work better if individual transactions could be added to the block chain instantly? You wouldn't have to wait ten minutes to purchase a hotdog with bit coins.(7 votes)
- The purpose of proof of work is to make imitation of block chain hard to malefactor. If proof of work was done on the instant time, it would be easy to construct the whole block chain and do the double money spending. So, the speed of new block construction is kept on the same level to make building a block chain a hard computational process.(8 votes)
- raises a question on the composition of a transaction block at node level. Say a transaction block is of size 5 and Node1 sees transactions 1,2,3,4,5 and Node2 seems transactions 1,2,3,4,6 (instead of '5'). Which block gets injected into the global transaction block chain? What about the transaction that does NOT exist in the chosen block? Also, when multiple nodes are processing this, is it a "winner takes it all" with the other blocks or partial work thrown away (waste of electricity!)? 1:15(8 votes)
- The longest chain wins and one block will be orphaned and the miner will lose the reward. The left over transactions will be remined in future blocks. During the hard fork a couple months ago 25 blocks were orphaned and all those block rewards were lost but apparently there was some deal behind the scenes so the compensation got spread around to those that lost out.(4 votes)
- This is interesting. Lets say it takes 10 minutes to find the correct hash value below the given difficulty value (the zeroes at the start of the hash) and the unconfirmed transactions are hashed via the tree structure into the block header which forms part of the end result hash. Doesn't this introduce a delay in processing new transactions ? Once a node starts searching for the correct hash whilst new transactions continue to arrive isn't there a problem with including these new transactions as they would need to be included into the current tree which will change the root hash meaning the whole result would need to be found again. How do real world miners solve this issue ? Do they select a certain number of transactions for inclusion in the block and then start looking for the hash result whilst ignoring the other new incoming transactions and leaving them for the next block or do I misunderstand something here ?(7 votes)
- From what I've read they choose a number of transactions to create a block and the new transactions will stay unprocessed until the a new block is created.(3 votes)
- So the only point of the (challenge, proof) handshake is to prevent spammers and DOS attacks?
What about the weeding out of malicious or just bad-at-math bitcoin miners? Does that depend on multiple miners working on the same transactions? I think i missed something, but not sure what/where.(4 votes)- No. The point is to prevent any one person from controlling the rules of what transactions get accepted as valid (and in what order). If you imagine a world of malicious bitcoin miners as well as "good" miners (i.e., those that follow the commonly followed rules of including transactions), then we just need to be assured that the total CPU power of "good" miners exceeds that of the malicious miners. So the more nodes mining, the harder it is for a bad actor to reverse transactions or prevent valid transactions from being added to the block chain.(6 votes)
- Is there a protocol for a situation where two different miners manage to find a proof at the exact same time as well as expending the exact same amount of work?
Can the person who is making the transaction set how much fee he is willing to give the miner responsible for adding the transaction? Or is it preset by the network.
If the answer to the above question is yes, then can the miners choose not to incorporate a transaction if they are being given negligible/no fee?(2 votes)- The sender sets the transaction fee, not the miner. The sender can decide whatever transaction fee he wants to use, as long as it is greater than a minimum fee of 0.0001 BTC /kB if the transaction volume is less than 0.1 BTC. (If the sender tries to make such a transaction, the nodes simply won't relay it, although it is still a valid transaction) The miners can also decide whichever transactions that they are willing to incorporate into their blocks, including rejecting any transactions that give a low fee.
If two miners find a proof at the same time, then both will broadcast the proof at the same time. Some nodes will receive block A first, while other nodes will receive the block B first. Those miners who receive block A first will start working to build the next block on top of block A. The miners who receive block B first will start working to build the next block on top of block B. If the next block is built on top of block A, block A wins. If the next block is built on top of block B, block B wins.(6 votes)
- This peer to peer aspect is a concern to me. I assume my client tracks my Bitcoins and the minors track all transactions. If there is a discrepancy, I seem to have no one to correct it. Is the transaction complete when both parties see a record of it in a minor's log records or is there some minor response to the parties? I would think there would be a vast amount of communications and latency if each transaction is sent to all nodes. It seems like a PC problem could cause a loss of money. How would I recover my correct Bitcoin balance? Thanks!(2 votes)
- If there was a discrepancy, such as a person giving themselves bitcoins out of thin air, then the other nodes would automatically detect it and throw it out. Discrepancies are not allowed.
All transactions are broadcast to everyone. Some people see this might be a problem because of lag or storage space as more and more people use Bitcoin.
A transaction is complete as soon as it is put into a block. There is no need for the receiver to respond or anything like that.(2 votes)
- Who decides, for given block, how much work has to be done as a proof (i.e. who decides the number of leading zeros)?
I am asking because I don't understand how if two miners come up with some proof at the same time, we can choose one of them based on amount of work for the entire chain. Where does the difference come from?(3 votes)- The one that gets spread through P2P network faster is accepted, the other is wasted. As you imagine, the probability of this event is quite low.(0 votes)
Video transcript
The last really essential
or salient piece for understanding the
mechanics of how Bitcoins work is what we call the
transaction block chain. So if you recall in
the previous video, you had a motivating
example of a user, Alice, who wanted to send
some number of Bitcoins to another user,
Bob, in the system. And what Alice has to do to
initiate that transaction was to construct a transaction--
a record of sorts-- that contained information
about the transaction and that was signed with
Alice's signing key. And that actually contained
Alice's public verification key and Bob's public
verification key as well. And that transaction information
was basically broadcast out, as we mentioned, to the
entire Bitcoin ecosystem. To all the nodes on the
Bitcoin peer-to-peer network. And the various nodes
in the Bitcoin ecosystem are going to sit there. They're going to
receive information about this transaction. But they're also going
to be getting information about a lot of
other transactions that are taking place
around the same time. And what these notes
are going to start doing is they're going to work on
incorporating this transaction record into a ledger of all
transactions that have ever taken place in the
Bitcoin system. And so what happens is that
each node basically starts off by taking all of the previously
unincorporated transactions that they've ever received. So there's going to be all these
transactions out there that have kind of happened
within a given time window. And there's all these
Bitcoin transactions kind of floating around. And these nodes-- these Bitcoin
miners as they're called-- are going to receive
information about all these different
transactions and they're going to start working
on incorporating those transactions. And their first goal is to
collate these transactions into what's known as
a transaction block. So if you recall
our ledger analogy, a single Bitcoin
transaction essentially corresponds to a proposed
entry in a ledger. In that capacity,
a transaction block would basically correspond
to her page in a ledger where you have multiple
transactions that are listed in that
page of the ledger. And the goal-- the Bitcoin
miner's goal-- is to really, essentially, to take
that page and get it added to the global ledger book,
the global comprehensive ledger book. Now to engage in this sort of
work, what these nodes will basically do is they'll first
take all the transactions that have been broadcast out. And let's say these
four transactions have been broadcast out. And they're going to basically
hash these transactions in pairs in basically
a tree-like structure. They'll take these
two transactions and they'll apply a
[? graphic ?] hash function to those details. And we'll get a
[? cars ?] flying digest, goes the same for these
two, and then they'll take these two
digests and hash them to get a single digest value. And this digest effectively
encodes all of the transactions that were previously
unincorporated and that were received by
these individual nodes. And then this
digest is basically going to be combined with
the hash of the transaction block that was previously
accepted by the network. So you can imagine if
there is-- the network will have a series
of transaction blocks that were previously accepted. And in fact, every
transaction block as I mentioned just
now incorporates the previous transaction lock. So this transaction
block will incorporate the one that was
used just before it, and this transaction
block will incorporate the one that was
used just for it. And it's going to
go on literally until the beginning
of Bitcoin times. So this is really
where the Bitcoin-- the beginning of time for
the Bitcoin system, this is just time equals
zero for Bitcoin. And they're going to
take this last block and they're going
to, essentially now, take this last block and combine
it with this most recent block. And so if you imagine that
you have now, not just an individual block, because
each individual block incorporates the
block before it. We're not dealing anymore with
an isolated or distinct block of transactions, but rather
with a chain of blocks that starts literally at the
beginning of the entire Bitcoin system. Now when you do all
of this combination, at the end of the
day, you're going to do some cryptographic
hashing and you basically will end up with a
sequence of numbers. And this sequence
of numbers will be derived by incorporating
all these blocks together. You'll get a
sequence of numbers, and what we're going
to basically do is take this sequence of numbers
and convert that sequence of numbers into a challenge
in a proof of work protocol. Now I did a separate video
on proof of protocols, I would encourage you
to watch that if you want to get a better
sense for how they work. But the short of it is that
what the Bitcoin mining node has to do at this point is he'll
take that Bitcoin-- he'll take the challenge and
he'll have to come up with a separate sequence of
numbers-- which we typically termed the proof, or
the proof of work-- and this proof of
work has to have a very specific
mathematical property. And what that
property entails is that if you take the
challenge numbers, and you take these
proof numbers, and you concatenate
them together, and you make them the input
to a cryptographic hash function, the
resulting output has to have a large prefix
of zeroes And that doesn't have to be all
zeroes, but a large portion of the beginning-- the
prefix-- has to be all zeroes And if you think about
for a moment, given that cryptographic
hash functions, given that their output
tends to look fairly random, it's unlikely in
any given instance that you are going
to see a proof. A proposed proof
that provides you with a large string of
zeroes at the beginning. And so what the Bitcoin miner
will have to do is on average, he'll have to try out
many possible choices for these proof numbers
until he finally gets lucky and he stumbles
upon one that has this kind of off-beat or
strange statistical property. And the actual difficulty of
finding these proof numbers, as you can tell, is
dependent on exactly how many leading zeroes
are required. The more leading zeroes
you require in this proof, the longer it takes to
actually solve a problem. The longer it takes to
actually come up with a proof that works with respect
to a given challenge. The fewer zeroes
that you require, the less time it will take. Now the exact number of
bits of zero bits required in the Bitcoin protocol
actually does change over time. It gets calibrated. And it's designed
to not, on average, the average time taken
across the whole system should be about 10 minutes. So you want to take about 10
minutes for at least one node to come up with a valid
proof, but keep in mind that a lot of nodes are working
on this proof concurrently. All right, now once this
proof of work is found, let's say that the proof of
work is eventually found. The Bitcoin miner will
announce the results to the overall
peer-to-peer network. He's going to take this proof
and really all the challenge, and so on, and he's going to
announce it to all the notes. And they're now going to
see that, hey, there's this proof out there,
somebody found it. Let's drop the other
stuff we were doing and we're going to now
start to work and build on top of this new proof. Remember, this new proof of
this new challenge, these all incorporate all the
previous transaction blocks. Really, what they're
starting to do is starting to work off of a
new, updated transaction block chain. And they're going to incorporate
any new unincorporated transactions into that
new transaction blocking. Now there are a couple of
points I want to make here. So first of all, as part of
constructing these transactions blocks, and really as
part of incorporating them into a transaction block
chain, Bitcoin miners are actually allowed--
one little special treat-- they are allowed to include
in that transaction block-- a special node for themselves. And this node will
basically be a little reward if they can get-- and
let me use the greenish color for that
reward-- they could take the first block,
the first transaction item, the first
transaction record, and they can put in that
transaction record-- they can assign a reward
to themselves. Now the amount of that
reward will change over time. But I do want to point out what
this transaction is typically called is called a coin-based
transaction, or a generation transaction. This is how new coins get
included in the Bitcoin system. So whenever a minor
succeeds in coming up with a proof as part of
that he'll have been allowed to come up with his own
transaction to reward himself, a special little
reward, for extending the effort necessary to
come up with this proof and for doing all this
work associated with adding a new transaction block to
the existing transaction block chain for Bitcoin. And I think that's reasonable. After all these notes are using
a lot of computational power to come up with these
proofs and if they're using computational
power that must mean that somewhere along
the line, somebody is spending money on
electricity and so on. Now, I also want to point
out that in addition to this coin-base
award, the nodes who're doing the Bitcoin mining,
the ones who succeed. Also get to collect
the transaction fees that were specified
in the transaction records. If you recall, a person issuing
a transaction in Bitcoin can allocate or set aside a
certain amount of money-- maybe it can be a Bitcoin or
a fractional Bitcoin-- for the node who
succeeds in coming up with the actual
proof of working, and effectively the
node that succeeds in being able to
add that transaction to the overall bitcoin
transaction block chain. And so that node that
does the work succeeds, gets a reward, another
transaction fee. Now this could actually
become quite large because the node will not
only get the transaction fee before one transaction. You'll get the transaction
fee for all the transactions that appeared in
the current block. It's going to give
the aggregate over all these different transactions. Now the second
point I want to make is that it might be
possible for two nodes to solve the proof of work
independently of each other. And somehow, they
both end up trying to add to that existing
chain in some ways. You make get some weird
chain forking happening. If that happens, the peers
in the Bitcoin network will basically break a tie
by sticking with the longest chain. And by longest, I
don't mean the one that has to be the most
transactions in it. I really need the one
that has the highest aggregate difficulty
associated with that underlying proof of work protocol in each
of the transaction blocks. And we'll basically look at
the total amount of effort that was required to generate
that chain with regard to that proof of work. And whichever chain has
the most work associated with it is a chain
that's sacrosanct, it's a chain that
everybody will accept. Now you may get some
word discrepancies because of network
latency issues and so on. But the idea is that after maybe
a couple of rounds when there are ties, they'll quickly
resolve themselves as long as most of the
nodes are being honest and really stick to the
implementation of the protocol. Now since Bitcoin miners
are generating bitcoins, I think there's an interesting
question that comes up here which is, how is the Bitcoin
money supply, controlled, and how is it managed? And I'm going to talk about that
concept in a subsequent video.