Alice’s Wallet Application and Transaction Construction
Alice’s wallet application contains all the logic for selecting appropriate inputs and outputs to build a transaction to Alice’s specification. Alice only needs to specify a destination and an amount, and the rest happens in the wallet application without her seeing the details. Importantly, a wallet application can construct transactions even if it is completely offline. Like writing a chaque at home and later sending it to the bank in an envelope, the transaction does not need to be constructed and signed while connected to the bitcoin network. It only has to be sent to the network eventually for it to be executed.
Getting the Right Inputs
Alice’s wallet application will first have to find inputs that can pay for the amount she wants to send to Bob. Most wallet applications keep a small database of “unspent transaction outputs” that are locked (encumbered) with the wallet’s own keys. Therefore, Alice’s wallet would contain a copy of the transaction output from Joe’s transaction which was created in exchange for cash (see “Getting your first bitcoins” on page 9). A bitcoin wallet application that runs as a full-index client actually contains a copy of every unspent output from every transaction in the blockchain. This allows a wallet to construct transaction inputs as well as to quickly verify incoming transactions as having correct inputs. However, since a full-index client takes up a lot of disk space, most user wallets run “lightweight” clients that track only the user’s own unspent outputs.
Retrieving Unspent Outputs
If the wallet application does not maintain a copy of unspent transaction outputs, it can query the bitcoin network to retrieve this information using a variety of APIs available by different providers, or by asking a full-index node using the bitcoin JSON RPC API. Below we see an example of a RESTful API request, constructed as an HTTP GET command to a specific URL. This URL will return all the unspent transaction outputs for an address, giving any application the information it needs to construct transaction inputs for spending. We use the simple command-line HTTP client cURL to retrieve the response:
Example of Unspent Outputs
The response above shows that the bitcoin network knows of one unspent output (one that has not been redeemed yet) under the ownership of Alice’s address 1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK. The response includes the reference to the transaction in which this unspent output is contained (the payment from Joe) and its value in Satoshis, at 10 million, equivalent to 0.10 bitcoin. With this information, Alice’s wallet application can construct a transaction to transfer that value to new owner addresses.
Selecting the Appropriate Inputs
As you can see, Alice’s wallet contains enough bitcoins in a single unspent output to pay for the cup of coffee. Had this not been the case, Alice’s wallet application might have to “rummage” through a pile of smaller unspent outputs, like picking coins from a purse until it could find enough to pay for coffee. In both cases, there might be a need to get some change back, which we will see in the next section, as the wallet application creates the transaction outputs (payments).
Basic Explanation of Bitcoin Transaction
Creating the Outputs
A transaction output is created in the form of a script that creates an encumbrance on the value and can only be redeemed by the introduction of a solution to the script. In simpler terms, Alice’s transaction output will contain a script that says something like “This output is payable to whoever can present a signature from the key corresponding to Bob’s public address.” Since only Bob has the wallet with the keys corresponding to that address, only Bob’s wallet can present such a signature to redeem this output. Alice will therefore “encumber” the output value with a demand for a signature from Bob.
Handling Change in Transactions
This transaction will also include a second output because Alice’s funds are in the form of a 0.10 BTC output, too much money for the 0.015 BTC cup of coffee. Alice will need 0.085 BTC in change. Alice’s change payment is created by Alice’s wallet in the very same transaction as the payment to Bob. Essentially, Alice’s wallet breaks her funds into two payments: one to Bob and one back to herself. She can then use the change output in a subsequent transaction, thus spending it later.
Adding a Transaction Fee
Finally, for the transaction to be processed by the network in a timely fashion, Alice’s wallet application will add a small fee. This is not explicit in the transaction; it is implied by the difference between inputs and outputs. If instead of taking 0.085 in change, Alice creates only 0.0845 as the second output, there will be 0.0005 BTC (half a millibitcoin) left over. The input’s 0.10 BTC is not fully spent with the two outputs, as they will add up to less than 0.10. The resulting difference is the transaction fee which is collected by the miner as a fee for including the transaction in a block and putting it on the blockchain ledger.
Viewing the Transaction on the Blockchain
The resulting transaction can be seen using a blockchain explorer web application.
Adding the Transaction to the Ledger
The transaction created by Alice’s wallet application is 258 bytes long and contains everything necessary to confirm ownership of the funds and assign new owners. Now, the transaction must be transmitted to the bitcoin network where it will become part of the distributed ledger, the blockchain. In the next section, we will see how a transaction becomes part of a new block and how the block is “mined.” Finally, we will see how the new block, once added to the blockchain, is increasingly trusted by the network as more blocks are added.
Transmitting the Transaction
Since the transaction contains all the information necessary to process, it does not matter how or where it is transmitted to the bitcoin network. The bitcoin network is a peer-to-peer network, with each bitcoin client participating by connecting to several other bitcoin clients. The purpose of the bitcoin network is to propagate transactions and blocks to all participants.
How the Transaction Propagates
Alice’s wallet application can send the new transaction to any of the other bitcoin clients it is connected to over any Internet connection: wired, Wi-Fi, or mobile. Her bitcoin wallet does not have to be connected to Bob’s bitcoin wallet directly, and she does not have to use the Internet connection offered by the Cafe, though both those options are possible too. Any bitcoin network node (other client) that receives a valid transaction it has not seen before will immediately forward it to other nodes to which it is connected. Thus, the transaction rapidly propagates out across the peer-to-peer network, reaching a large percentage of the nodes within a few seconds.
