EVERYTHING YOU NEED HOW BITCOIN FLOWS

Reality

If anyone says they have 5 bitcoins in their wallet they actually mean, they have unspent transaction outputs (utxo) which, clubbed together sum up to 5 bitcoins. And to have utxo they should first have a bitcoin address which consists version, public key hash followed by check sum, and bitcoin address could be shared by QR Code.

Begin Transaction

When buyer pays 3 bitcoins to seller it means, he has transferred 3 bitcoins to seller’s bitcoin address i.e. he has initiated a transaction which converts his existing utxo(specified by txid) to seller’s address (specified either by P2PKH or P2SH) along with buyer’s signature(specified by buyer’s full public key) and pub key script(instructions, that allows anyone to spend amount who control buyer’s private key).

Spend Transaction

Now if the seller who received 3 bitcoins would like to transfer them, he adds prev-txid, vout, script sig to the Input, where prev-txid is txid of buyer to seller, vout is output index of buyer to seller, script sigs which is collection of data parameters (receivers public key, signature) that satisfied conditions placed by pub key script of buyer to seller.

With the above input, amount and new txid along with new pub script will be send to the new indented bitcoin address and transaction is uploaded to the network.  

Transaction validation or Mining

Once uploaded the transaction has to be validated and then will be added to the block chain(which provides bitcoins public ledger and is an ordered and time stamped record of transactions). A transaction that is added to the network will be validated by bitcoin miners by proof of work which avoids double spending of bitcoins.

For validation miners check two things in a transaction, first that you are actual recipients of utxo, Second that you have not already used those utxo. If everything is proper the miner will add transaction to his personal list of valid transactions, and every few minutes one miner will be given chance to add their personal list i.e. a block to the official block chain.

A block will be added to the official block chain if miner transactions are valid and miner correctly guessed a random number called nonce. So miner adds previous block signature, 

and the transaction.

Mining Rewards

Not just that miners get rewarded in two ways viz. few bitcoins as reward, small transaction fee from the person who has initiated the transaction. So to gain such rewards  many miners compete to add transaction to network, bitcoin rules ask miners to generate a difficult hash (like one that starts with certain number of zeros), which involves a combination of inputs one of which is a random number called ‘nonce’ that miners will have to guess, and miners with powerful computers can make such guess faster, so miners usually invest in high performance computing.

Multi Ouput transactions

A single transaction can create multiple outputs, as would be the case when sending to multiple addresses, but each output of a particular transaction can only be used as an input once in the block chain. It means if you have utxo of 1BTC, 1.5BTC and if you need to pay 0.5BTC to seller then, you have to sign utxo of 1BTC to seller with output of 0.5 BTC to seller and change of 0.5BTC to your own bitcoin address.

Any bitcoin transaction can have multiple inputs (n1btc, n2btc, n3btc) and multiple outputs (r1btc, r2btc) with condition r1+r2=n1+n2+n3,  but to be noted that n1btc cannot be divided directly to be used in two transactions (but has to generated as new utxo with (n-k)btc).Hence either  of n1,n2,n3 btc cannot be reused in another transaction avoiding double spending.