Transactions do not become part of the blockchain until its added into a block by a process called Mining and that block is validated by full nodes
Bitcoins counterfeit protection is based on computation
Transactions are grouped together into blocks
Blocks have a very small header which has to be formed in a very specific way
This required a lot of computation to get right but very little computation to verify
Mining leads to the creation of new bitcoins (like a central bank)
The first block in the blockchain is called the “genesis” block
Decentralized Lottery
Mining is like a decentralized lottery
Each miner can create their own ticket by creating a candidate block
The block includes transactions they want to mine along with some additional fields
The candidate block is provided as the input to a hash function
If the hash output matches an template that is determined by the Bitcoin protocol the miner wins the lottery
The block along with its transactions will be accepted as valid by the system
If the output does not match the template the miner makes small changes to their candidate block and tries again
It takes the miner billions of tries to find hash that matches the required template
Once the hash is found its trivial to verify the hash using the hash function
The data required to generate the proof (block) is called proof-of-work (PoW)
Candidate Blocks
Transactions are prioritized to be added to a block based on transaction fee and some other factors
Miner start mining a new candidate block as soon as they receive the previous valid block on the network
The new candidate blocks created will has a commitment (reference) to the previous block in the chain
Each miner includes a special transaction in their candidate block
This transaction includes the bitcoin address of the miner (used to send reward)
New bitcoin plus sum of all the transaction fee in the block is sent to the address
The miner only receives the reward if their candidate block become a valid block
Miners who participate in a mining pool have their nodes setup to create candidate blocks that assign the reward to a pool of addresses
New transactions on the network are added to a pool of unverified transactions
Once its verified by a full node it can be included a candidate block
Alterative Chains
When there are multiple alternative chains to choose from the full nodes select the chain that has the most total PoW (best blockchain)
For the entire network to accept an alternative chain an additional new block will have to be mined on top of the alternative chain (i.e. make it the longest chain)
To create an alternate chain the miners would have to mine two blocks instead of creating the usual single block
This is much less profitable and require significantly more computation than creating a new single block
When a block with an transaction is added to the blockchain it acts as a single confirmation for all the transactions in the block
When a new block is mined and is added to the top of the previous block it gives the transactions in the previous block two confirmations
Now if an attacker wants to change a transaction in the 1st block they would need to create an alternative chain with three blocks
As more blocks are added it becomes significantly difficult to change transactions in old blocks
Any block that has six or more confirmations are considered very hard to change
Verification
Once a block in embedded in the blockchain a full node can independently verify that its valid and spendable
Lightweight clients can perform partial verification by confirming that the transaction is in the blockchain and has several blocks are mined after it