Deep Dive: How Bitcoin Transactions Work Under the Hood🚀

As a Rust blockchain developer on a mission to build secure, low-level systems, I recently took a deep dive into the core mechanics of Bitcoin transactions. This blog post breaks down what I learned into clear, precise steps with a developer's eye — ideal for engineers, or anyone serious about understanding how real digital money moves.

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🔊 TL;DR (But Detailed)

Bitcoin transactions follow a strict sequence: they are created, signed, verified, broadcast, and finally, confirmed into blocks. Each transaction uses two key components:

• scriptSig: the unlocking script (included by the sender)
• scriptPubKey: the locking script (included in the output by the sender, meant for the recipient)

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⛓️ Step-by-Step Bitcoin Transaction Lifecycle

1️⃣ Sender Creates a Transaction

• Selects UTXOs to spend (inputs)
• Signs each input using their private key
• Includes their public key in the scriptSig
• Creates a new output (scriptPubKey) locked to the recipient’s public key hash (address)

scriptSig = <signature> <public key>
scriptPubKey = OP_DUP OP_HASH160 <recipient_pubkey_hash> OP_EQUALVERIFY OP_CHECKSIG

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2️⃣ Nodes Validate the Transaction

• All Bitcoin full nodes independently verify:
  • Is the signature valid for the transaction?
  • Does the public key hash match the one in the locking script?
• The signature is verified using ECDSA math, not decryption

If all checks pass → ✅ added to mempool and possibly mined into a block

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3️⃣ Recipient’s Wallet Detects the UTXO

• Monitors blockchain or queries a full node
• Matches scriptPubKey (locking script) against recipient’s address
• If matched, adds the UTXO to recipient’s spendable balance

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4️⃣ Recipient Sends Bitcoin to Another Person

• Uses wallet to:
  • Select UTXOs
  • Sign them with private key
  • Include public key in new scriptSig
  • Lock outputs to new recipient’s public key hash

Repeat the cycle ♻️

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🔐 scriptSig vs. scriptPubKey

Script	Purpose	Location
scriptSig	Unlock the previous UTXO	Transaction input
scriptPubKey	Lock the Bitcoin to a new address	Transaction output

Example (Pay-to-PubKey-Hash):

scriptPubKey:
OP_DUP OP_HASH160 <pubkey_hash> OP_EQUALVERIFY OP_CHECKSIG

scriptSig:
<signature> <public_key>

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⚖️ What Is P2SH (Pay-to-Script-Hash)?

P2SH enhances Bitcoin's flexibility:

• Instead of locking to a pubkey hash, you lock to a script hash
• Recipient provides the redeem script and required data during spending

Example:

scriptPubKey (P2SH):
OP_HASH160 <redeem_script_hash> OP_EQUAL

scriptSig:
<data> <redeem_script>

Used for:

• Multi-signature wallets
• Escrow contracts
• Timelocked transactions

✅ Final Words

I aim to become protocol-native architect, and this journey into Bitcoin scripting is just the beginning.

Stay tuned for upcoming posts, where I’ll explore:

• How to build a Bitcoin wallet UTXO scanner in Rust
• Simulating script execution using Rust enums
• Comparing UTXO-based vs. account-based models

Thanks for reading! If you found this helpful, feel free to connect or collaborate. Let’s build trustless systems, together.