Chapter 2. How Bitcoin Works
The Bitcoin system, unlike traditional banking and payment systems, does not require trust in third parties. Instead of a central trusted authority, in Bitcoin, each user can use software running on their own computer to verify the correct operation of every aspect of the Bitcoin system. In this chapter, we will examine Bitcoin from a high level by tracking a single transaction through the Bitcoin system and watch as it is recorded on the blockchain, the distributed journal of all transactions. Subsequent chapters will delve into the technology behind transactions, the network, and mining.
Bitcoin Overview
The Bitcoin system consists of users with wallets containing keys, transactions that are propagated across the network, and miners who produce (through competitive computation) the consensus blockchain, which is the authoritative journal of all transactions.
Each example in this chapter is based on an actual transaction made on the Bitcoin network, simulating the interactions between several users by sending funds from one wallet to another. While tracking a transaction through the Bitcoin network to the blockchain, we will use a blockchain explorer site to visualize each step. A blockchain explorer is a web application that operates as a Bitcoin search engine, in that it allows you to search for addresses, transactions, and blocks and see the relationships and flows between them.
Popular blockchain explorers include the following:
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