₿ How Bitcoin Transactions Work & The Architecture of the Bitcoin Network

Published on: July 26, 2025
By: CyberDudeBivash | cyberdudebivash.com

📦 What Is a Bitcoin Transaction?

A Bitcoin transaction is a transfer of bitcoin value from one digital wallet to another. It’s not just about sending coins—it’s about cryptographically proving ownership, recording the transfer in a public ledger, and ensuring that the sender cannot double-spend the same bitcoin elsewhere.

🧩 Basic Components of a Bitcoin Transaction

Each Bitcoin transaction consists of the following:

1. Inputs

• References to previous transactions (Unspent Transaction Outputs, or UTXOs) from which the bitcoins are coming.
• Each input includes:
  • Transaction ID (of the previous tx)
  • Index number (pointing to a specific output)
  • Digital signature (to prove ownership)
  • Public key

2. Outputs

• Where the bitcoins are going.
• Each output includes:
  • Amount (in satoshis)
  • Recipient’s public key hash (address)

3. Transaction Fee

• Optional difference between inputs and outputs.
• Incentivizes miners to include the transaction in a block.

🔐 How a Bitcoin Transaction Works (Step-by-Step)

➤ Step 1: Initiation

A user (Alice) creates a transaction to send 0.5 BTC to Bob. She uses her wallet to:

• Select an unspent output (UTXO) worth 0.5 BTC or more.
• Input Bob's Bitcoin address as the recipient.

➤ Step 2: Digital Signature

Alice signs the transaction with her private key, proving she owns the input funds. Her public key and signature are added to the transaction.

➤ Step 3: Broadcast to the Network

The transaction is broadcasted to Bitcoin nodes for verification.

➤ Step 4: Verification

Nodes:

• Check if the input UTXOs are unspent.
• Verify Alice’s digital signature using her public key.
• Validate transaction format and fees.

➤ Step 5: Mining & Block Inclusion

Miners:

• Group valid transactions into a block.
• Compete to solve a Proof-of-Work (PoW) puzzle.
• The winning miner adds the block to the blockchain.

➤ Step 6: Confirmation

Bob sees the transaction as “pending” initially. After 1 block confirmation (usually ~10 minutes), it’s accepted. More confirmations (6+) increase security.

🌐 Bitcoin Network Architecture Explained

Bitcoin's architecture is a peer-to-peer (P2P), decentralized, and permissionless network with no central server or authority. Here's a breakdown:

🧠 1. Full Nodes

• Core of the network: They store the entire blockchain, validate transactions, and propagate blocks.
• Run Bitcoin Core software.
• Help maintain consensus.
• Can mine, but most don’t.

⚒️ 2. Mining Nodes (Miners)

• Compete to create new blocks by solving PoW puzzles.
• Upon success, they earn:
  • Block reward (currently 3.125 BTC post-2024 halving)
  • Transaction fees from included transactions
• Require specialized hardware (ASICs).
• Mining pools group miners together for higher reward probability.

💼 3. Wallets

• Interfaces for users to send/receive BTC.
• Hold private keys (never the coins themselves).
• Can be:
  • Software wallets (desktop/mobile)
  • Hardware wallets (Trezor, Ledger)
  • Paper wallets or custodial wallets

🌍 4. P2P Network Layer

• Nodes connect using TCP.
• Use gossip protocol to share transactions and blocks.
• Each node connects to ~8 peers randomly.

🔧 5. Consensus Mechanism

Bitcoin uses Proof-of-Work (PoW) to maintain agreement across all nodes. Key points:

• Only the longest valid chain is accepted.
• Prevents double-spending.
• Makes rewriting history computationally infeasible.

🛠️ 6. Scripting and Smart Contracts (Simplified)

• Bitcoin uses a limited, stack-based scripting language.
• Used for:
  • Multisig wallets
  • Timelocks
  • Escrow functionality
• Not Turing complete (unlike Ethereum) for security reasons.

🔄 How It All Connects: A Visual Snapshot