Blockchain & Money: Session 5: Blockchain Basics & Transactions, UTXO, & Script Code by M.I.T. Sloan School of Management with Professor Gary Gensler

Session 5: Blockchain Basics & Transactions, UTXO, & Script Code

• Session 5 Study Questions:
  • How does Bitcoin record transactions? What is Unspent Transaction Output (UTXO)? What is script code embedded in each Bitcoin transaction and how flexible a programming language is it?
  • As many design features (public key cryptography, hash functions, append-only timestamped logs, digital cash, & proof-of-work) pre-date Bitcoin, what was the novel innovation of Satoshi Nakamoto?
  • Who is Satoshi Nakamoto? (Only kidding a bit.)

• Session 5 Readings:
  • ‘Bitcoin’s Academic Pedigree’ Narayanan and Clark
  • ‘Making Sense of Cryptoeconomics’ CoinDesk
  • Narayanan & Clark’s Chronology of Ideas in Bitcoin

Overview: Transaction Inputs & Outputs; Unspent Transaction Output (UTXO); Scripting Language; Blockchain Design–Putting it All Together; Bitcoin’s Academic Pedigree; Who is Satoshi Nakamoto?; Conclusions.

• Coinbase Transaction
  • Reward for solving proof-of-work.
    • Only input is the Coinbase Block Reward
    • Reward halves (1/2’s) every 210,000 blocks
      • Currently 12.5 Bitcoins per block
      • Originally 50 Bitcoin per block
  • Output may not be used as a Transaction Input until another 100 blocks
  • Recorded as First Transaction in Merkle Tree
  • May include 100 bytes of arbitrary data
    • Used for additional Nonce.
    • Genesis Block included Headline from Financial Times:
      • ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’
• Unspent Transaction Output (UTXO) Set
  • (Bitcoin transaction outputs that have not been spent at a given time).
    • Contains All Currently Unspent Transaction Outputs
    • Speeds up Transaction Validation Process
    • Stored using a LevelDB database in Bitcoin Core called ‘chainstate’
• Bitcoin Script
  • Programming Code used for Transactions
    • Stack-based Code, with no Loops (not Turing-complete)
    • Provides a flexible set of instructions for Transaction Validation & Signature Authentication
    • Most Common Script Types in UTXO:
      • Transaction sent to Hash of Bitcoin Address-“Pay-to-PubkeyHash” (81%)
      • Transaction sent to Hash of Conditional Script–“Pay-to-ScriptHash” (18%)
      • Transaction subject to multiple signatures–“M of N Multisig” (0.7%)
      • Transaction sent to Bitcoin address–“Pay-to-Pubkey” (0.1%)

• Bitcoin–Technical Features
  • Cryptography & Timestampled Logs
    • Cryptographic Hash Functions
    • Timestamped Append-only Logs (Blocks)
    • Block Headers & Merkle Trees
    • Asymmetric Cryptography & Digital Signatures
    • Addresses
  • Decentralized Network Consensus
    • Proof-of-Work
    • Native Currency
    • Network
  • Transaction Script & UTXO
    • Transaction Inputs & Outputs
    • Unspent Transaction Output (UTXO) set
    • Scripting Language

• Conclusions:
  • Nakamoto’s Bitcoin brought us Blockchain Technology
  • Blockchain technology is within long history of Money & Ledgers
  • Its Design Features also can be placed within history of technology
    • Timestamped Append-only Logs (Blocks)
    • Cryptographic Hash Functions & Digital Signatures
    • Network Consensus
  • Key Innovation–Decentralized Chained Consensus Protocol
    • Addresses ‘Costs of Trust’
    • Provides Peer-to-Peer alternative for Money, Ledgers & Computation