Bitcoin Deep Dive: Mining, Consensus & UTXOs

Yesterday we learned what a blockchain is. Today, we look at the most famous blockchain of all — Bitcoin — and understand the clever mechanisms that make it work without anyone in charge.

The Bitcoin Whitepaper

In October 2008, someone called Satoshi Nakamoto published a 9-page paper: "Bitcoin: A Peer-to-Peer Electronic Cash System." It proposed a way to send money online without banks, using cryptography and a clever incentive system.

The key insight: if you make it expensive to write to the ledger, and profitable to write honestly, you don't need trust. You need math.

Proof of Work: The Consensus Mechanism

In any shared ledger, someone has to decide which transactions are valid and in what order. Bitcoin's answer is Proof of Work (PoW).

Here's how it works:

Miners collect pending transactions into a candidate block
They repeatedly hash the block data with a random number (called a nonce)
The goal: find a hash that starts with a certain number of zeros
This is pure brute-force guessing — there's no shortcut
The first miner to find a valid hash broadcasts the block to the network
Other nodes verify it (easy) and add it to their chain

Target:  000000000000000000...  (lots of leading zeros)
Attempt 1: nonce=0    → hash: 8a3f7b2c...  ✗
Attempt 2: nonce=1    → hash: 1d9e4f8a...  ✗
...
Attempt 4,291,087: nonce=4291087 → hash: 00000000000003a1f...  ✓ Found!

⚡ Why "work"?

Finding the right nonce takes real computational effort — electricity, hardware, time. This cost is what makes it economically irrational to attack the network. To rewrite history, you'd need to re-do all that work, faster than everyone else combined.

Mining Difficulty Adjustment

Bitcoin targets one new block every ~10 minutes. But as more miners join (or leave), the collective hash power changes. So every 2,016 blocks (~2 weeks), the network automatically adjusts the difficulty — making the target hash easier or harder to find.

More miners → harder target → still ~10 minutes per block. It's a self-regulating system.

The Block Reward & Halving

Why do miners bother? Two reasons:

Block reward — newly minted bitcoin given to the winning miner (currently 3.125 BTC)
Transaction fees — small fees attached to each transaction in the block

The block reward halves every 210,000 blocks (~4 years). It started at 50 BTC in 2009, and will eventually reach zero around the year 2140. This is why Bitcoin has a hard cap of 21 million coins.

UTXOs: How Bitcoin Tracks Balances

Bitcoin doesn't have "accounts" with balances like a bank. Instead, it uses UTXOs — Unspent Transaction Outputs.

Think of it like cash. You don't have an "account" with $50 — you have a $20 bill and a $30 bill. When you pay someone $25, you hand over the $30 bill and get $5 change.

In Bitcoin:

Every transaction creates outputs (like new bills)
When you spend, you consume (destroy) existing UTXOs and create new ones
Your "balance" is the sum of all UTXOs that your private key can unlock

TX #1234:
  Input:  UTXO worth 0.5 BTC (from a previous tx)
  Output: 0.3 BTC → recipient address
          0.199 BTC → your change address
          0.001 BTC → miner fee

Why UTXO Instead of Accounts?

The UTXO model has some nice properties:

Privacy — change goes to a new address each time, making tracking harder
Parallelism — independent UTXOs can be processed simultaneously
Simplicity — no need to track running balances; just check if inputs exist and are unspent

It's also why Bitcoin transactions can look confusing at first — you always spend entire UTXOs and get change back.

🔑 Key Takeaways

Proof of Work secures Bitcoin by making it expensive to write and easy to verify
Difficulty adjusts every ~2 weeks to maintain 10-minute block times
Block rewards halve every ~4 years — creating a fixed supply of 21M coins
Bitcoin uses UTXOs (like digital cash) instead of account balances