Bitcoin Basics: Wallets, Transactions, and Double Spending Explained

Learn the fundamentals of how Bitcoin works, including how digital wallets store funds, how payments are made, and how the blockchain prevents double spending. This beginner-friendly guide is ideal for students, developers, and crypto enthusiasts exploring real-world blockchain applications.

1. UnderstandingBlockchain
withCryptocurrency:
AISHWARYA

2. BitcoinandBlockchain
Bitcoin:Bitcoinisadecentralizeddigitalcurrency,introducedbyananonymouspersonor
groupunderthepseudonymSatoshiNakamotoin2008.Itallowspeer-to-peertransactions
withouttheneedforacentralauthoritylikeabankorgovernment.

3. Key Features of Bitcoin:
Decentralization: Bitcoin operates on a network of computers (nodes) that are spread across
the globe, eliminating the need for intermediaries.
FixedSupply:Only21millionbitcoinswilleverbecreated,makingitdeflationaryanda
potentialstoreofvalue.
Transactions:Bitcointransactionsarerecordedontheblockchain.UserscontrolBitcoin
throughcryptographicprivateandpublickeys,whichactasdigitalsignaturesforsecuretransfers.
Mining:Newbitcoinsarecreatedthroughaprocesscalledmining,whereparticipantssolve
complexmathematicalproblemstovalidatetransactionsandaddthemtotheblockchain.In
return,minersarerewardedwithnewlycreatedbitcoins.
TransparencyandPseudonymity:Alltransactionsarepublicandvisibleonthe
blockchain,buttheidentitiesoftheusersremainpseudonymous(tiedtoaddresses,notpersonal
information).

4. Blockchain
BlockchainisthetechnologythatunderpinsBitcoinandmanyothercryptocurrencies.Itisa
distributed,immutableledgerthatrecordsalltransactionsacrossanetworkofcomputersina
secureandtransparentway.
HowBlockchainWorks:
DistributedLedger:Inablockchain,everynode(computer)onthenetworkhasacopyofthe
ledger.Whenanewtransactionismade,itisbroadcasttothenetworkforvalidation.
Blocks:Transactionsaregroupedtogetherintoblocks.Eachblockcontainsalistoftransactions,
areferencetothepreviousblock(ahash),andatimestamp.
ConsensusMechanism:Thenetworkusesaconsensusmechanism,suchasProofofWork(used
byBitcoin),toagreeonthestateoftheledgerandtovalidatenewblocks.Thisensuresthe
networkistrustless,meaningparticipantsdon’tneedtotrusteachother.

5. HowBlockchainWorks:
Immutability:Onceablockisaddedtotheblockchain,itcannotbealteredwithoutchangingall
subsequentblocks,makingtheblockchaintamper-proof.Thisfeatureprovidessecurityandtrust
inthesystem.
Decentralization:Blockchainisdecentralized,meaningit’snotcontrolledbyanysingleentity.
Eachparticipant(node)inthenetworkhasequalauthorityandcanverifytransactions
independently.

6. RelationshipBetweenBitcoinandBlockchain
BlockchainisthetechnologythatenablesBitcointooperateasadecentralizeddigitalcurrency.
Bitcoinisthefirstapplicationofblockchaintechnology,butblockchainhasmanypotential
usesbeyondcryptocurrencies(e.g.,supplychainmanagement,votingsystems,andhealthcare
records).
Bitcoin’sblockchainisspecializedfortrackingBitcoinownershipandensuringtheintegrityof
itsfinancialtransactions,butblockchainsingeneralcanbeadaptedformanyotherpurposes.

7. Benefits of Blockchain for Bitcoin:
Security:Thecryptographicnatureofblockchainensuressecuretransactions
andstorageofdata.
Transparency:EveryBitcointransactionisvisibleontheblockchain,providing
fulltransparency.
NoDouble-Spending:BlockchainensuresthatthesameBitcoincannotbespent
morethanoncethroughitsvalidationandconsensusmechanisms.
TrustlessEnvironment:Blockchaineliminatestheneedfortrustedthirdparties
(likebanks),asconsensusandcryptographyensuretheaccuracyandsecurityof
thenetwork.

8. Cryptocurrency ?
Cryptocurrency,sometimescalledcrypto-currencyorcrypto,isanyformof
currencythatexistsdigitallyorvirtuallyandusescryptographytosecure
transactions.
Cryptocurrenciesdon'thaveacentralissuingorregulatingauthority,instead
usingadecentralizedsystemtorecordtransactionsandissuenewunits

9. What is Cryptocurrency
•Cryptocurrencyisadigitalpaymentsystemthatdoesn'trelyonbankstoverify
transactions.It’sapeer-to-peersystemthatcanenableanyoneanywheretosend
andreceivepayments.
•Insteadofbeingphysicalmoneycarriedaroundandexchangedintherealworld,
cryptocurrencypaymentsexistpurelyasdigitalentriestoanonlinedatabase
describingspecifictransactions.
•Whenyoutransfercryptocurrencyfunds,thetransactionsarerecordedinapublic
ledger.Cryptocurrencyisstoredindigitalwallets.
The first cryptocurrency wasBitcoin

10. Creation of coins
Theunitsofcryptocurrencyarecreatedthroughaprocesscalledmining.
Miningistheprocessofvalidatingcryptocurrencytransactionsandcreatingnew
unitsofcryptocurrency.
Theminingprocessusespowerfulcomputerhardwareandsoftwaretosolve
complexmathematicalproblemsthatgeneratecoins.
Minersusepowerfulcomputerstosolvecomplexmathematicalproblems.
Whentheysolvetheseproblems,theyverifytransactionsandaddanew
blocktotheblockchain.
Asarewardfortheirwork,minersaregivennewcoins.Thisishownew
Bitcoin,forexample,iscreated.

11. Coins

12. Coins
•Coinsaredigitalcurrenciesthatoperateontheirownblockchain.Theyare
primarilyusedasamediumofexchange,liketraditionalmoney,andcanbe
minedorstaked.
•Examples:Bitcoin(BTC),Ethereum(ETH),Litecoin(LTC).
•Coinsaregenerallyusedforpayments,storeofvalue,ortransferringvalue
withintheirownnetworks.
•Eachcoinhasitsownindependentblockchain.Forexample,Bitcoinoperateson
theBitcoinblockchain,andEtheroperatesontheEthereumblockchain.

13. Tokens
Tokensaredigitalassetscreatedontopofanotherblockchain.Theyoften
representautilityorassetwithinaspecificprojectorplatform.
Examples:ERC-20tokensontheEthereumnetwork,likeChainlink(LINK)or
Uniswap(UNI).NFTs(non-fungibletokens)alsofallintothetokencategory.
Purpose:Tokenscanhavevariouspurposes:
◦Utilitytokens:Usedwithinaspecificapplicationorplatform(e.g.,foraccessor
transactions).
◦Securitytokens:Representownershipinanasset(similartostocks).
◦Stablecoins:PeggedtoastableassetliketheUSdollar(e.g.,USDT,USDC).
Blockchain:Tokensdonothavetheirownblockchain.Theyrelyonthe
infrastructureofanexistingblockchainlikeEthereum,BinanceSmartChain,or
Solana.

14. Coins vs Tokens
Parameters COINS TOKEN
Blockchain Operateontheirownblockchain
(e.g.,BitcoinontheBitcoin
blockchain,EtherontheEthereum
blockchain)
Createdonexistingblockchains,
usuallythroughsmartcontracts(e.g.,
tokensontheEthereumblockchain,
likeUSDTorChainlink).
Function Primarilyusedasdigitalcurrencyor
astoreofvalue(forpayments,
trading,etc.)
Oftenrepresentassets,accessto
services,orutilitywithinspecific
applicationsorecosystems.
Creation Createdthroughmining(Proofof
Work)orstaking(ProofofStake)as
partoftheblockchain'sconsensus
mechanism.
Createdthroughsmartcontracts,
typicallyviainitialcoinofferings
(ICOs)ordecentralizedapplications
(dApps).

15. Steps to create Cryptocurrency

16. Cryptocurrency mining reward
Cryptocurrency miners need money. They receive a small fraction of new units of
cryptocurrency for completing “blocks” of verified transactions that are added to
the blockchain.
1. Miners are compensated in the cryptocurrency they are mining. When miners
choose to validate a block of Bitcoin transactions, their reward is paid in Bitcoin.
2.Bypoolingtheirresourcestogether,minerscanboosttheirchancesof
successfullyminingablock,whilesharingtheexpenses.However,inthis
arrangement,theyonlyreceiveafractionofthetotalreward.Thisprocessis
referredtoasacryptocurrencyminingreward.

17. Payments
Apaymentincryptocurrencyinvolvestransferringdigitalassets(likeBitcoin,
Ethereum,etc.)fromonewallettoanother.
Eachpaymenttransactionisverifiedbyanetworkofcomputers(minersor
validators),ensuringthatthetransactionislegitimate.
Onceverified,thetransactionisaddedtotheblockchain,whichservesasa
permanent,unalterablerecord.

18. Double Spending
Doublespendingisapotentialriskuniquetodigitalcurrencieswherethesame
cryptocurrencyisspentmorethanonce.
Sincedigitalcurrenciesarejustbitsofdata,theoretically,someonecouldtryto
replicateoralterthetransactioninformationtospendthesamecoinsmultiple
times.
Forexample,apersonmighttrytosendthesameBitcointotwodifferent
merchantsorusersatthesametime.

19. How is Double Spending Prevented?
•BlockchaintechnologyandProofofWork(usedinBitcoin)orProofofStake
(usedinEthereum2.0)aredesignedtopreventdoublespending.
•Whenatransactionismade,itisbroadcasttothenetworkofminers/validators.
•Theycompetetoverifythetransactionandincludeitinanewblock.Oncea
blockisconfirmedandaddedtotheblockchain,thetransactionbecomes
permanentandcannotbealtered.
•Thisensuresthatthesamecryptocurrencycannotbespenttwice,asthenetwork
wouldrejectanyattempttodoso

20. Types Of Double Spending Attacks
FinneyAttack:Theattackerpre-minesablockcontainingaconflicting
transaction.Theattackerthenspendsthesamefundsinatransactionwiththe
merchant.Ifthepre-minedblockisaddedtotheblockchainbeforethe
merchant’stransactionisconfirmed,theattackercandoublespend.Thegoalisto
exploitthedelaybetweenthebroadcastofthemerchant’stransactionandthe
miningoftheattacker’spre-minedblock.
51%Attack:Anattackergainscontrolofmorethan50%ofthenetwork’stotal
computingpower(hashrate)orstake.Thismajoritycontrolallowstheattackerto
reorganizetheblockchain,invalidatetransactions,anddoublespend.Thegoalis
toaltertheblockchain’stransactionhistory,allowingtheattackertoreverseorre-
spendpreviouslyconfirmedtransactions.

21. Bitcoin Scripts
BitcoinScriptsaresmallprogramsorsetsofinstructionsembeddedinBitcoin
transactions.TheydefinetheconditionsthatneedtobemetfortheBitcoinbeing
senttobeunlockedandspentbytherecipient.
BitcoinusesascriptinglanguagecalledScript,whichissimple,notTuring-
complete(meaningitavoidscomplexloops),andspecificallydesignedforsecure
transactions.

22. Example:
Youwanttosend1Bitcoin(BTC)toyourfriend,andthetransactionneedstobe
lockedwithaconditionthatonlyyourfriendcanspenditbyprovidingtheir
signature.
Pay-to
PubKey-Hash(P2PKH)ScriptExample:
1.ScriptPubKey(LockingScript):
Whenyousend1BTCtoyourfriend,thetransactioncreatesaScriptPubKey.
Thisscript"locks"the1BTCwithaconditionthatonlysomeonewiththecorrespondingprivatekey(your
friend)canunlockit.
Thelockingscriptmightlooklikethis:
OP_DUP OP_HASH160
<Friend's Public Key Hash>
OP_EQUALVERIFY
OP_CHECKSIG

23. Each part:
•OP_DUP:Duplicatesthepublickeyprovidedbythespender.
•OP_HASH160:Hashesthepublickeytoproducethepublickeyhash.
•<Friend’sPublicKeyHash>:Thisisthehashedpublickeyofyourfriend
(Bitcoinaddress).
•OP_EQUALVERIFY :Verifiesthatthepublickeyhashmatchesyourfriend's
publickeyhash.
•OP_CHECKSIG:Checksthatthesignatureprovidedbythespender(your
friend)isvalid.

24. 2. ScriptSig(Unlocking Script):
Whenyourfriendwantstospendthe1BTC,theymustprovideanunlockingscript(ScriptSig)
thatsatisfiestheconditionsoftheScriptPubKey.
Theunlockingscriptmightlooklikethis:
<Friend'sSignature>:Thedigitalsignaturecreatedusingtheirprivatekey.
<Friend'sPublicKey>:Thepublickeyassociatedwiththeprivatekeythatcreatedthe
signature.
<Friend's Signature>
<Friend's Public Key>

25. Bitcoin P2P Network
Apeer-to-peer(P2P)networkisbasedontheconceptofdecentralization,which
allowstheparticipantstoconducttransactionswithoutneedingacentralserver.
Thepeersornodes(usuallyacomputer)communicatewitheachotheronthe
networkfreelywithoutanintermediary.
Inthisnetwork,allparticipants(callednodes)communicatedirectlywithone
anothertovalidatetransactionsandblocks,propagateinformation,andmaintain
theintegrityofthesystem.

26. 1. Nodes
NodesareindividualcomputersparticipatingintheBitcoinnetwork.They
performseveralkeytasks:
NodesvalidatenewtransactionsandblockstoensuretheyfollowtheBitcoin
protocol.Fullnodesstoretheentireblockchain,whichcontainsthehistoryofall
Bitcointransactions.Nodespropagatetransactionsandblockstoothernodesin
thenetwork.

27. 2. Decentralization
There’snocentralserverorauthorityintheBitcoinnetwork.Eachnodeis
independentandconnectstoothernodes.Thisdecentralizationensures:
Nosinglepointoffailure
Increasedresilienceagainstattacksorcensorship
Globalaccesswithoutneedingpermission

28. 3. Gossip Protocol
TheBitcoinP2Pnetworkusesagossipprotocoltoshareinformation.Whena
nodereceivesanewtransactionorblock,itforwards(or"gossips")this
informationtoitspeernodes,whichinturnpropagatethedatatotheirpeers.
Thisensuresthatnewinformationisquicklydistributedthroughoutthenetwork.

29. Transaction Propagation
WhenauserinitiatesaBitcointransaction,itisbroadcasttothenearestnode.
Thetransactionisverifiedbythenode(checkingforthingslikevalidsignatures
andsufficientfunds).
Onceverified,thenoderelaysthetransactiontoitsconnectedpeers,which
continuepropagatingthetransactionacrossthenetwork.
Minerscollectthesetransactionstoincludeinthenextblock.

30. 5. Block Propagation
Onceaminersuccessfullyminesablock,itispropagatedtothenetwork.
EachreceivingnodevalidatestheblocktoensureitfollowstheBitcoin
consensusrules(correctProofofWork,validtransactions,correcthash,etc.).
Aftervalidation,thenoderelaystheblocktoitspeers,andtheprocesscontinues
untiltheblock

31. 6. Mining and Consensus
ThenetworkreachesconsensusthroughtheProofofWorkmechanism,where
minerscompetetosolvecryptographicpuzzlesandcreatenewblocks.
Onceablockismined,itisaddedtotheblockchain,andothernodesverifyits
validity.
Iftwoblocksareminedatnearlythesametime,nodesmayhavedifferentviews
oftheblockchain,buteventually,oneofthechainsbecomeslonger,andthe
networkconvergesonthatchain.

32. 7. Network Latency and Block Propagation
Time
Duetothedecentralizednatureofthenetwork,thereissomelatencyinhow
quicklytransactionsandblocksarepropagated.
Minimizingpropagationtimeisimportantforpreventingsituationswheretwo
minersunknowinglymineblocksatthesametime,resultingintemporaryforks
intheblockchain.

33. 8. Peer Discovery
WhenanewnodejoinstheBitcoinnetwork,itneedstofindotherpeersto
connectwith.Thisisdonethroughaprocesscalledpeerdiscovery,whichuses
hardcodedDNSseednodesoralistoftrustednodes.
Onceconnected,thenewnodewillbegindownloadingtheblockchainfrompeers
andstartparticipatinginthenetwork.

34. Incentive Structure
TheBitcoinnetworkisself-sustainingthrougheconomicincentives.Minersare
rewardedwithnewbitcoins(blockrewards)andtransactionfeesforsecuringthe
networkandconfirmingtransactions.Thisprovidesafinancialmotivationfor
participantstomaintainthenetwork.

35. How do peer-to-peer (P2P) networks work?
AP2Pnetworkhasnocentralserveroverlookingthem;theusersornodesare
responsibleformaintainingthenetwork.Everynodeparticipatinginthe
networkactsasaserverthatcanupload,download,andsharefileswithother
nodes.
Thenodesusetheirharddrivesinsteadofacentralservertostorethisdata.As
thesecapabilitiestotransmit,receiveandstorefilesliewitheachnode,theP2P
networkismoresecure,fastandefficient.
Itisimportanttonotethattomakepeernodeseasilylocatabletonewpeersthat
jointhenetwork,theP2Parchitecturemusthavemanyactivenodesinthe
blockchainnetwork,asthisiswhenitfunctionsbest.Ifmanynodesleavethe
network,itisnecessarytoensureenougharelefttopickuptheslack.

37. Types of peer-to-peer (P2P) networks
1.Structuredpeer-to-peernetworks:Inthisnetwork,anorganisedstructureis
usedinwhichthenodesinteract,makingitpossibleforthenodestoeasilysearchforfilesevenif
thedataisunavailable.Duetothisorganisedstructure,someamountofcentralisationexistsin
thistypeofnetwork.
2.Unstructuredpeer-to-peernetworks:Inthistypeofnetwork,thereisnoset
structureforthenodestofollow.Participantscanjoinorleavethenetworkasandwhen
theydesire.
Thislackofadefinitestructureleadsparticipantstocommunicaterandomlywitheachother.This
networkiseasytobuild,butitrequireshighCPUpowerasallnodesmustremainactiveto
processahighnumberoftransactions

38. Hybridpeer-to-peernetworks:AhybridP2Pnetworkisacombinationofa
peer-to-peerandclient-servermodel.Thenetworkhasacentralserverthatstores
informationonthelocationofresourcesandusesthisservertoconductsearches.

39. Role of Peer-to-peer (P2P) in Blockchain
P2Pnetworkingarchitectureisafundamentalelementinblockchaintechnology,asitallows
cryptocurrencies(e.g.Bitcoinnetwork)tobetransferredgloballywithoutanyintermediary,
middlemanorcentralserver.
ThecreatorofBitcoin,SatoshiNakamoto,referredtoitasa“peer-to-peerelectroniccashsystem”
whichwascreatedwiththeaimofhavingaP2Pdigitalformofmoney.

40. Benefits of P2P networks
Low cost
In a P2P network, every node acts as a server, and there is no central server. This
saves the cost of buying an expensive server, making it a cost-effective network.
Scalable
Bottlenecks faced in a centralisedserver model, when the number of clients
increases, are eliminated in a P2P network as each node can be a server. The P2P
network is designed to be scalable, as an increase in the number of clients results
in an equal increase in the number of servers.

41. Benefits of P2P networks
Resilient
Compared to centralisednetworks, a P2P network is more resilient to failure as
the loss of a single node does not bring down the entire network.

42. Drawbacks of P2P networks
Slowperformance
EverynodeorcomputerintheP2Pnetworkisaccessedbyothernodes,slowing
downtheuser’sperformance.
Dataisvulnerable
Theabsenceofacentralserversometimesmakesthisnetworkhardto
manage,ascontrollingormonitoringillegalorprohibitedactivityisdifficult.No
centralauthoritymanagesoperations,sodatabecomesvulnerabletomalware
attacks.
Highcomputationalpower
AhugeamountofcomputingpowerisrequiredforP2Pnetworkssinceeachnode
actsasboththeclientandtheserver.

43. Transaction in Bitcoin Network
AtransactionintheBitcoinnetworkisafundamentaloperationthattransfers
ownershipofbitcoinsfromoneusertoanother.Everytransactionisrecorded
ontheblockchainandconsistsofinputs,outputs,andcryptographicsignatures
thatensureitsauthenticity.

44. Key Components of a Bitcoin Transaction:
Inputs:
Eachtransactioninputreferencesaprevioustransaction’soutputthatthesenderowns
andintendstospend.
Theinputincludes:
TransactionID(TxID):TheIDoftheprevioustransactionfromwhichthebitcoinis
coming.
OutputIndex:Aspecificreferencetotheindexoftheoutputfromtheprevious
transactionthatisbeingspent.
UnlockingScript(SignatureScriptorScriptSig):Ascriptthatprovestheownership
oftheinput.Itusuallyincludesadigitalsignatureandthepublickeyoftheowner,
provingtheycontrolthebitcoinbeingspent.

45. Key Components of a Bitcoin Transaction:
Outputs:
Each transaction output specifies where the bitcoin is being sent and how much is being sent.
The output includes:
◦Amount: The number of bitcoins being transferred to the recipient.
◦Locking Script (ScriptPubKey): A script that locks the output to a recipient's public address.
The recipient must provide a valid unlocking script (in a future transaction) to spend this
output.
A single transaction can have multiple outputs, for instance:
◦One output for the recipient.
◦One output for any change back to the sender if the input amount exceeds the intended
payment amount.

46. Key Components of a Bitcoin Transaction:
Digital Signatures:
Each input must be signed by the sender using their private key. This signature proves
that the sender is the legitimate owner of the bitcoins and authorizes the transfer.
The transaction signature is unique and prevents anyone from modifying the transaction
once signed.
Transaction Fee:
Transaction fees incentivize miners to include transactions in the next block. The fee is
calculated as the difference between the total value of the inputs and the total value of
the outputs:
Fee = (Sum of Inputs) -(Sum of Outputs).
While fees are optional, in practice, most transactions include fees to ensure they are
processed promptly.

47. How a Transaction Works in the Bitcoin
Network:
1.CreationofaTransaction:
Whenauserwantstosendbitcoins,theyinitiateatransactionbyselectingpreviously
receivedbitcoins(unspenttransactionoutputs,orUTXOs)asinputsandspecifyingone
ormoreoutputs(recipientaddressesandamounts).
Atransactioncanhavemultipleinputsandoutputs.Thesumofinputsmustcoverthe
totaloutputs(includingfees).
2.SigningtheTransaction:
Theusersignsthetransactionwiththeirprivatekey,creatingadigitalsignature.This
signatureisincludedintheunlockingscriptofeachinput.

48. How a Transaction Works in the Bitcoin
Network:
3.BroadcastingtheTransaction:
Aftersigning,thetransactionisbroadcasttotheBitcoinP2Pnetwork,whereitis
propagatedfromnodetonodeusingagossipprotocol.
4.TransactionValidation:
Eachnodethatreceivesthetransactionperformsseveralvalidationchecks:
Ensuresallreferencedinputsexistandareunspent(UTXOs).
Verifiesthesignatureoftheinputsusingthepublickey.
Ensuresthatthesumofinputsisgreaterthanorequaltothesumofoutputs(validfee
calculation).ChecksthatthetransactionfollowsallBitcoinprotocolrules.
Ifthetransactionisvalid,thenoderelaysittoitspeers.

49. How a Transaction Works in the Bitcoin
Network:
5.InclusioninaBlock(Mining):Validtransactionsarecollectedbyminersand
includedinthenextblockthattheyattempttomine.
Minersprioritizetransactionsbasedonthefeetheyoffer.Transactionswithhigherfees
aregenerallyincludedinblocksmorequickly.
Whenaminersuccessfullyminesablock,thetransactionisaddedtotheblockchain,
meaningithasbeenconfirmed.
6. Confirmation:
Oncethetransactionisincludedinablock,itreceivesitsfirstconfirmation.
Eachsubsequentblockminedontopofthatblockincreasesthenumberof
confirmations.Generally,sixconfirmationsareconsideredsecureforlargetransactions.

50. Transaction Life Cycle in Bitcoin:
UserInitiates:Ausergeneratesatransaction,signsitwiththeirprivatekey,and
broadcastsittothenetwork.
Broadcast&Propagation:ThetransactionispropagatedthroughtheBitcoinnetwork,
witheachnodevalidatingit.
MinersIncludeTransaction:Minerspickupthetransaction,bundleitintoacandidate
block,andcompetetosolveacryptographicpuzzle(ProofofWork)toaddtheblockto
theblockchain.
TransactionConfirmations:Oncetheblockcontainingthetransactionismined,the
transactionreceivesitsfirstconfirmation.Moreconfirmationsareaddedassubsequent
blocksareminedontop.
FinalSettlement:Afterasufficientnumberofconfirmations(typically6),thetransaction
isconsideredfinalandirreversible.