What is Bitcoin and How Does It Work? The Complete Architecture Guide

1. The Byzantine Generals Problem Solved

Published on October 31, 2008 by Satoshi Nakamoto, Bitcoin resolved computer science's classic Byzantine Generals problem: achieving consensus among untrusted distributed nodes across an open network without a central coordinating authority.

Unlike traditional electronic fiat money which relies on double-entry accounting ledgers maintained by custodial clearinghouses, Bitcoin is an append-only distributed ledger secured by economic thermodynamic work.

2. The Unspent Transaction Output (UTXO) Model

Bitcoin does not store account balances like a traditional bank account or Ethereum's account-based state model. Instead, ownership of Bitcoin is represented as discrete cryptographic coins known as UTXOs (Unspent Transaction Outputs).

When you initiate a Bitcoin transfer, your wallet consumes one or more existing UTXOs as inputs, unlocks them with your private cryptographic signature, and produces new outputs: the recipient's output and a change output returned back to your wallet.

• P2PKH (Legacy): Addresses starting with 1 (higher transaction fees).
• P2SH: Addresses starting with 3 (multi-signature and early SegWit).
• P2WPKH (Native SegWit): Bech32 addresses starting with bc1q (lower fees, block weight discounts).
• P2TR (Taproot): Bech32m addresses starting with bc1p (enhanced Schnorr signature privacy and complex script efficiency).