Bitcoin Transactions

# 2. Transactions

We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.

> 💡 In plain terms
> A Bitcoin "coin" is not a file you pass around — it's a history of signatures.
>
> Here's the simplest way to think about it:
> - Alice owns some bitcoin. Her ownership is proven by her private key (a secret password only she has).
> - To send bitcoin to Bob, Alice uses her private key to digitally "sign" a message that says:
>   "I'm passing ownership to Bob's public key."
> - This signature is attached to the end of the coin's history.
> - Bob — or anyone — can look at the full chain of signatures and verify
>   that the coin legitimately passed from its original creation all the way to Bob.
>
> It's like a physical check endorsed from person to person, except the endorsements are mathematically unforgeable.

The problem of course is the payee can't verify that one of the owners did not double-spend the coin. A common solution is to introduce a trusted central authority, or mint, that checks every transaction for double spending. After each transaction, the coin must be returned to the mint to issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent. The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.

> 💡 In plain terms
> Here's the problem the signature chain alone doesn't solve:
> Alice could sign the same coin over to both Bob AND Carol at the same time.
> Both signatures would look valid individually.
>
> The old solution was a central "mint" — a company that keeps the master ledger and won't approve a coin twice. But that just recreates a bank.
> The whole system then depends on that one company being honest, solvent, and not censoring transactions.

We need a way for the payee to know that the previous owners did not sign any earlier transactions. For our purposes, the earliest transaction is the one that counts, so we don't care about later attempts to double-spend. The only way to confirm the absence of a transaction is to be aware of all transactions. In the mint based model, the mint was aware of all transactions and decided which arrived first. To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received. The payee needs proof that at the time of each transaction, the majority of nodes agreed it was the first received.

> 💡 In plain terms
> Bitcoin's answer: make every transaction public and let thousands of independent computers vote on which one came first.
>
> There's no secret ledger held by one company.
> Every transaction is broadcast to the entire network.
> The network then collectively agrees on the order — and the first valid transaction wins. Any later attempt to spend the same coin is simply rejected.
>
> "The earliest transaction is the one that counts" — this simple rule, enforced by the whole network rather than a single authority, is what makes Bitcoin work without a bank.

> ⚡ Why It Works vs. Traditional Finance
> In traditional banking, the bank's private database is the source of truth.
> You have no independent way to verify your own balance — you trust the bank's records.
>
> In Bitcoin, the transaction history is public and replicated across thousands of nodes.
> Anyone can audit the entire history from the very first transaction.
> There is no hidden ledger. There is no "trust us" — only verifiable, public mathematics.

Bitcoin Transactions

// COMMENTS

ON THIS PAGE