Popular blockchain explorers include the following:

Each of these has a search function that can take a Bitcoin address, transaction hash, block number, or block hash and retrieve corresponding information from the Bitcoin network. With each transaction or block example, we will provide a URL so you can look it up yourself and study it in detail.

Alice, introduced in the previous chapter, is a new user who has just acquired her first bitcoins. In [getting_first_bitcoin], Alice met with her friend Joe to exchange some cash for bitcoins. Since then, Alice has bought additional bitcoins. Now Alice will make her first spending transaction, buying access to a premium podcast episode from Bob’s online store.

Bob’s web store recently started accepting bitcoin payments by adding a Bitcoin option to its website. The prices at Bob’s store are listed in the local currency (US dollars), but at checkout, customers have the option of paying in either dollars or bitcoin.

Alice finds the podcast episode she wants to buy and proceeds to the checkout page. At checkout, Alice is offered the option to pay with bitcoin in addition to the usual options. The checkout cart displays the price in US dollars and also in bitcoin (BTC), at Bitcoin’s prevailing exchange rate.

Bob’s ecommerce system will automatically create a QR code containing an invoice (Invoice QR code.).

Unlike a QR code that simply contains a destination Bitcoin address, this invoice is a QR-encoded URI that contains a destination address, a payment amount, and a description. This allows a Bitcoin wallet application to prefill the information used to send the payment while showing a human-readable description to the user. You can scan the QR code with a bitcoin wallet application to see what Alice would see:

Alice uses her smartphone to scan the barcode on display. Her smartphone shows a payment for the correct amount to Bob's Store and she selects Send to authorize the payment. Within a few seconds (about the same amount of time as a credit card authorization), Bob sees the transaction on the register.

You can use a block explorer to examine blockchain data, such as the payment made to Bob in Alice’s transaction.

In the following sections, we will examine this transaction in more detail. We’ll see how Alice’s wallet constructed it, how it was propagated across the network, how it was verified, and finally, how Bob can spend that amount in subsequent transactions.

In simple terms, a transaction tells the network that the owner of certain bitcoins has authorized the transfer of that value to another owner. The new owner can now spend the bitcoin by creating another transaction that authorizes the transfer to another owner, and so on, in a chain of ownership.

Alice’s wallet application contains all the logic for selecting inputs and generating outputs to build a transaction to Alice’s specification. Alice only needs to choose a destination, amount, and transaction fee, and the rest happens in the wallet application without her seeing the details. Importantly, if a wallet already knows what inputs it controls, it can construct transactions even if it is completely offline. Like writing a check 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.

Alice’s transaction is now propagated on the Bitcoin network. It does not become part of the blockchain until it is included in a block by a process called mining and that block has been validated by full nodes. See [mining] for a detailed explanation.

Bitcoin’s system of counterfeit protection is based on computation. Transactions are bundled into blocks. Blocks have a very small header that must be formed in a very specific way, requiring an enormous amount of computation to get right—​but only a small amount of computation to verify as correct. The mining process serves two purposes in Bitcoin:

Mining achieves a fine balance between cost and reward. Mining uses electricity to solve a computational problem. A successful miner will collect a reward in the form of new bitcoins and transaction fees. However, the reward will only be collected if the miner has only included valid transactions, with the Bitcoin protocol’s rules for consensus determining what is valid. This delicate balance provides security for Bitcoin without a central authority.

Mining is designed to be a decentralized lottery. Each miner can create their own lottery ticket by creating a candidate block that includes the new transactions they want to mine plus some additional data fields. The miner inputs their candidate into a specially designed algorithm that scrambles (or "hashes") the data, producing output that looks nothing like the input data. This hash function will always produce the same output for the same input—​but nobody can predict what the output will look like for a new input, even if it is only slightly different from a previous input. If the output of the hash function matches a template determined by the Bitcoin protocol, the miner wins the lottery and Bitcoin users will accept the block with its transactions as a valid block. If the output doesn’t match the template, the miner makes a small change to their candidate block and tries again. As of this writing, the number of candidate blocks miners need to try before finding a winning combination is about 168 billion trillion. That’s also how many times the hash function needs to be run.

However, once a winning combination has been found, anyone can verify the block is valid by running the hash function just once. That makes a valid block something that requires an incredible amount of work to create but only a trivial amount of work to verify. The simple verification process is able to probabalistically prove the work was done, so the data necessary to generate that proof—​in this case, the block—​is called proof of work (PoW).

Transactions are added to the new block, prioritized by the highest fee rate transactions first and a few other criteria. Each miner starts the process of mining a new candidate block of transactions as soon as they receive the previous block from the network, knowing that some other miner won that iteration of the lottery. They immediately create a new candidate block with a commitment to the previous block, fill it with transactions, and start calculating the PoW for the candidate block. Each miner includes a special transaction in their candidate blocks, one that pays their own Bitcoin address the block reward plus the sum of transaction fees from all the transactions included in the candidate block. If they find a solution that makes the candidate into a valid block, they receive this reward after their successful block is added to the global blockchain and the reward transaction they included becomes spendable. Miners who participate in a mining pool have set up their software to create candidate blocks that assign the reward to a pool address. From there, a share of the reward is distributed to members of the pool miners in proportion to the amount of work they contributed.

Alice’s transaction was picked up by the network and included in the pool of unverified transactions. Once validated by a full node, it was included in a candidate block. Approximately five minutes after the transaction was first transmitted by Alice’s wallet, a miner finds a solution for the block and announces it to the network. After each other miner validates the winning block, they start a new lottery to generate the next block.

The winning block containing Alice’s transaction became part of the blockchain. The block containing Alice’s transaction is counted as one confirmation of that transaction. After the block containing Alice’s transaction has propagated through the network, creating an alternative block with a different version of Alice’s transaction (such as a transaction that doesn’t pay Bob) would require performing the same amount of work as it will take all Bitcoin miners to create an entirely new block. When there are multiple alternative blocks to choose from, Bitcoin full nodes choose the chain of valid blocks with the most total PoW, called the best blockchain. For the entire network to accept an alternative block, an additional new block would need to be mined on top of the alternative.

That means miners have a choice. They can work with Alice on an alternative to the transaction where she pays Bob, perhaps with Alice paying miners a share of the money she previously paid Bob. This dishonest behavior will require they expend the effort required to create two new blocks. Instead, miners who behave honestly can create a single new block and receive all of the fees from the transactions they include in it, plus the block subsidy. Normally, the high cost of dishonestly creating two blocks for a small additional payment is much less profitable than honestly creating a new block, making it unlikely that a confirmed transaction will be deliberately changed. For Bob, this means that he can begin to believe that the payment from Alice can be relied upon.

Approximately 19 minutes after the block containing Alice’s transaction is broadcast, a new block is mined by another miner. Because this new block is built on top of the block that contained Alice’s transaction (giving Alice’s transaction two confirmations), Alice’s transaction can now only be changed if two alternative blocks are mined—​plus a new block built on top of them—​for a total of three blocks that would need to be mined for Alice to take back the money she sent Bob. Each block mined on top of the one containing Alice’s transaction counts as an additional confirmation. As the blocks pile on top of each other, it becomes harder to reverse the transaction, thereby giving Bob more and more confidence that Alice’s payment is secure.

In Alice’s transaction included in a block., we can see the block that contains Alice’s transaction. Below it are hundreds of thousands of blocks, linked to each other in a chain of blocks (blockchain) all the way back to block #0, known as the genesis block. Over time, as the "height" of new blocks increases, so does the computation difficulty for the chain as a whole. By convention, any block with more than six confirmations is considered very hard to change, because it would require an immense amount of computation to recalculate six blocks (plus one new block). We will examine the process of mining and the way it builds confidence in more detail in [mining].