Learning Objectives – after this chapter you will be able to:
- Explain the UTXO model with inputs, outputs, change and fees.
- Describe Bitcoin Script and common address formats.
- Explain Bitcoin’s monetary policy: halving and the 21 million cap.
- Outline important upgrades: SegWit, Taproot and the Lightning Network.
Bitcoin in Brief
- Bitcoin is the first decentralized cryptocurrency, launched in January 2009 by Satoshi Nakamoto (Chapter 6).
- It is a peer-to-peer electronic cash system: payments go directly between users, validated by a network of nodes using Proof-of-Work (Chapter 15).
- The unit is the bitcoin (BTC); the smallest unit is the satoshi – 1 BTC = 100,000,000 satoshis (108).
- New blocks are produced on average every 10 minutes.
The UTXO Model
Bitcoin does not store account balances. It tracks Unspent Transaction Outputs (UTXOs) – “coins” created by earlier transactions that have not yet been spent. A wallet’s balance is the sum of all UTXOs it can unlock.
Example – Alice pays Bob 0.7 BTC
Inputs (spent)UTXO #1: 0.5 BTC
UTXO #2: 0.3 BTC
Total 0.8 BTC
UTXO #2: 0.3 BTC
Total 0.8 BTC
TransactionSigned by Alice to prove she can spend both inputs.
Outputs (new UTXOs)Bob: 0.7 BTC
Alice (change): 0.099 BTC
Fee = 0.8 − 0.799 = 0.001 BTC
Alice (change): 0.099 BTC
Fee = 0.8 − 0.799 = 0.001 BTC
- A UTXO must be spent in full; any remainder is sent back to the sender as a change output.
- The fee is not written explicitly – it is the difference between total inputs and total outputs, and it goes to the miner.
- Double spending is prevented because each UTXO can be spent only once; nodes reject any transaction that tries to spend an already-spent output.
Bitcoin Script and Address Formats
- Every output carries a small program (locking script) stating the condition to spend it – usually “provide a valid signature for this public key hash”. The spender supplies an unlocking script (signature + public key).
- Bitcoin Script is stack-based and intentionally not Turing-complete (no loops), which keeps validation simple and safe.
| Type | Address starts with | Description |
|---|---|---|
| P2PKH (legacy) | 1… | Pay to public-key hash – the original format. |
| P2SH | 3… | Pay to script hash – used for multisig and wrapped SegWit. |
| P2WPKH (SegWit) | bc1q… | Native SegWit – lower fees. |
| P2TR (Taproot) | bc1p… | Taproot – Schnorr signatures, better privacy for complex scripts. |
Monetary Policy: Halving and Fixed Supply
| Period | 2009 | 2012 | 2016 | 2020 | 2024 |
|---|---|---|---|---|---|
| Block subsidy | 50 BTC | 25 BTC | 12.5 BTC | 6.25 BTC | 3.125 BTC |
- The block subsidy halves every 210,000 blocks (about four years).
- Because of halving, the total supply can never exceed 21 million BTC. The subsidy will reach zero around the year 2140; after that, miners will earn only transaction fees.
- Difficulty is adjusted every 2,016 blocks to keep the 10-minute average (Chapter 15).
Important Upgrades and Layer-2
- SegWit (2017): moved signature (“witness”) data out of the main transaction structure, fixed transaction malleability and increased effective block capacity.
- Taproot (2021): introduced Schnorr signatures and more private, efficient complex spending conditions.
- Lightning Network: a Layer-2 network of payment channels that enables near-instant, low-fee payments, settling to the Bitcoin blockchain only when channels open or close (Chapter 30).
- Upgrades are proposed as Bitcoin Improvement Proposals (BIPs) and usually deployed as backward-compatible soft forks (Chapter 26).
Key Takeaways
- Bitcoin tracks UTXOs, not balances; fee = inputs − outputs; change returns to the sender.
- Spending conditions are written in simple, non-Turing-complete Bitcoin Script.
- Halving every 210,000 blocks caps supply at 21 million BTC.
Question / Answer (15 questions)
Answer : A UTXO (Unspent Transaction Output) is an output of a previous Bitcoin transaction that has not yet been spent. Bitcoin tracks ownership as a set of UTXOs rather than as account balances.
Answer : It is the sum of the values of all UTXOs that the wallet’s keys can unlock. There is no single balance field stored on the blockchain.
Answer : A UTXO must be spent completely. If its value is larger than the payment, the sender creates an extra output that returns the remainder to an address they control; this is the change output.
Answer : The fee equals total input value minus total output value. It is not stated explicitly in the transaction, and it is collected by the miner who includes the transaction.
Answer : Inputs total 0.8 BTC and outputs total 0.799 BTC, so the fee is 0.001 BTC (100,000 satoshis).
Answer : Every node keeps track of which outputs are unspent. A UTXO can be consumed only once; any later transaction that tries to spend the same output is invalid and rejected.
Answer : A satoshi is the smallest unit of bitcoin: 1 BTC equals 100,000,000 (10^8) satoshis.
Answer : A locking script, attached to an output, defines the conditions to spend it (for example, a signature matching a public-key hash). An unlocking script, supplied by the spender, provides the data (signature and public key) that satisfies those conditions.
Answer : It deliberately has no loops, so every script finishes quickly and predictably. This keeps validation simple and protects nodes from denial-of-service attacks.
Answer : Legacy P2PKH addresses start with 1, P2SH with 3, native SegWit (P2WPKH) with bc1q and Taproot (P2TR) with bc1p.
Answer : A halving cuts the block subsidy in half every 210,000 blocks (about four years). After the April 2024 halving, the subsidy is 3.125 BTC per block.
Answer : The subsidy starts at 50 BTC and halves every 210,000 blocks. The sum of this geometric series approaches 21 million, and the protocol rules reject blocks that create more than the allowed subsidy.
Answer : SegWit (2017) separated signature data from the transaction data used to compute the transaction ID, fixing transaction malleability and increasing effective block capacity through block weight.
Answer : The Lightning Network is a Layer-2 payment-channel network on top of Bitcoin. Users exchange many off-chain payments quickly and cheaply and settle the net result on the blockchain only when channels are opened or closed.
Answer : After the block subsidy reaches zero (around 2140), miners will be rewarded only by the transaction fees included in the blocks they mine.
MCQ Test : Check Your Understanding (5 questions)
Select an option and press Check Answer, or answer all questions and press Submit Test to see your score. Each answer comes with an explanation.
Bibliography/References
The notes, questions and MCQs on this page are original explanations written for this course. The works listed below were consulted and are cited for attribution and further reading. Product names, logos and trademarks belong to their respective owners. Short quotations, where used, are marked and attributed.
- Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. https://bitcoin.org/bitcoin.pdf
- Bitcoin Project. (n.d.). Bitcoin Developer Guide. developer.bitcoin.org. https://developer.bitcoin.org/devguide/
- Wuille, P., Nick, J., & Ruffing, T. (2020). BIP-340: Schnorr Signatures for secp256k1. Bitcoin Improvement Proposals. https://github.com/bitcoin/bips/blob/master/bip-0340.mediawiki
- Antonopoulos, A. M. (2017). Mastering Bitcoin: Programming the Open Blockchain (2nd ed.). O’Reilly Media.
- Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton University Press. ISBN 978-0-691-17169-2.