Bitcoin Implementation - Educational Project

A comprehensive, educational implementation of Bitcoin's core concepts built from scratch in Python. This project demonstrates deep understanding of blockchain technology, cryptographic principles, and the inner workings of the Bitcoin protocol.

Created for Summer of Bitcoin 2025 preparation 🚀

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📚 Table of Contents

• What is Bitcoin?
• How Bitcoin Works
• Project Structure
• Features Implemented
• Quick Start
• Deep Dives
  • Bitcoin Scripts
  • Transaction Prioritization
• Learning Path
• Use Cases
• Disclaimer

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🪙 What is Bitcoin?

Bitcoin is the world's first decentralized digital currency that enables peer-to-peer transactions without intermediaries like banks. Created by Satoshi Nakamoto in 2008, Bitcoin solves the double-spending problem through a distributed ledger called the blockchain.

Key Innovations

• Decentralization: No central authority controls Bitcoin
• Cryptographic Security: Public-key cryptography secures ownership
• Proof of Work: Mining ensures consensus and prevents spam
• Limited Supply: Only 21 million Bitcoin will ever exist
• Immutability: Past transactions cannot be altered

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⚙️ How Bitcoin Works

1. Wallets & Addresses

Every user has a wallet containing:

• Private Key: Secret number used to sign transactions (proves ownership)
• Public Key: Derived from private key, used for verification
• Address: Hash of public key, shared to receive Bitcoin

# Generate a wallet
wallet = Wallet()
print(f"Address: {wallet.address}")  # Where others send you Bitcoin

Analogy: Think of the address as your email, public key as your identity, and private key as your password.

2. UTXO Model (Unspent Transaction Outputs)

Bitcoin doesn't track "account balances" like a bank. Instead, it tracks UTXOs - individual chunks of Bitcoin.

How it works:

• Your balance = sum of all UTXOs you own
• To spend, you must consume entire UTXOs and create new ones
• Change goes back to you as a new UTXO

Example:

Alice has UTXO: 50 BTC
Alice wants to send 10 BTC to Bob

Transaction:
  Input:  50 BTC UTXO (consumed completely)
  Outputs:
    - 10 BTC to Bob (new UTXO)
    - 40 BTC to Alice (change, new UTXO)

Why this design?

• ✅ Prevents double-spending (UTXO can only be spent once)
• ✅ Improves privacy (harder to track total balances)
• ✅ Enables parallel validation (transactions are independent)

3. Transactions

A transaction moves Bitcoin from one address to another by:

1. Referencing inputs: Which UTXOs are being spent
2. Creating outputs: New UTXOs for recipients
3. Signing with private key: Proves you own the inputs
4. Broadcasting to network: Miners include it in a block

# Create transaction
tx_input = TxInput(prev_tx_hash="abc123...", prev_output_index=0)
tx_output = TxOutput(amount=10_00000000, recipient_address=bob.address)
tx = Transaction(inputs=[tx_input], outputs=[tx_output])

# Sign it
tx.sign_inputs(alice_wallet, utxo_set)

# Broadcast
blockchain.add_transaction(tx)

Analogy: Like writing a check - you reference money you have (inputs), specify who gets how much (outputs), and sign it (cryptographic signature).

4. Mining & Proof of Work

What is mining? The process of adding new blocks to the blockchain by solving a cryptographic puzzle.

The puzzle: Find a number (nonce) such that:

hash(block_data + nonce) < target

Where target is a number starting with N zeros (difficulty).

Example:

Difficulty = 4
Target = 0000ffffffffffffffffffff...

Try nonce = 0:     hash = 8a3f2c... ❌
Try nonce = 1:     hash = 7b2e1d... ❌
Try nonce = 2:     hash = 6c4d3f... ❌
...
Try nonce = 142857: hash = 0000abc... ✅ Found it!

Why mining matters:

• ✅ Consensus: Everyone agrees on transaction history
• ✅ Security: Changing history requires re-mining all subsequent blocks (computationally infeasible)
• ✅ Incentives: Miners earn rewards (new Bitcoin + transaction fees)
• ✅ Decentralization: Anyone can mine, no central authority

# Mine a block
block = blockchain.mine_pending_transactions(miner_address)
# Miner earns 50 BTC + transaction fees

5. Blockchain Structure

A blockchain is a chain of blocks, where each block contains:

• Transactions
• Previous block's hash (creates the "chain")
• Timestamp
• Nonce (Proof of Work)

Block 99              Block 100             Block 101
┌──────────────┐      ┌──────────────┐      ┌──────────────┐
│ Prev: ...abc │◄─────│ Prev: ...xyz │◄─────│ Prev: ...def │
│ Hash: ...xyz │      │ Hash: ...def │      │ Hash: ...ghi │
│ Nonce: 12345 │      │ Nonce: 67890 │      │ Nonce: 24680 │
│ Txs: [...]   │      │ Txs: [...]   │      │ Txs: [...]   │
└──────────────┘      └──────────────┘      └──────────────┘

Immutability: If you try to change Block 100:

• Its hash changes
• Block 101's "previous hash" is now invalid
• Must re-mine Block 101
• But that changes Block 101's hash
• Must re-mine Block 102, 103, ... to the tip
• Nearly impossible if chain is long!

# Validate entire blockchain
is_valid = blockchain.is_chain_valid()
# Checks all hashes, links, and Proof of Work

6. Network & Consensus

Bitcoin operates as a peer-to-peer network:

1. Nodes connect to peers
2. Transactions are broadcast to all nodes
3. Miners compete to mine blocks
4. Longest valid chain wins (most cumulative work)
5. All nodes sync to the longest chain

This achieves consensus without central authority!

# P2P simulation
node1 = Node("Miner-1")
node2 = Node("Miner-2")
node1.connect_to_peer(node2)

# Broadcast transaction
node1.broadcast_transaction(tx)
# node2 receives it automatically

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📁 Project Structure

bitcoin-implementation/
│
├── bitcoin_implementation.py          # Core Bitcoin implementation
│   ├── Wallet & Key Management
│   ├── UTXO Model
│   ├── Transactions & Signing
│   ├── Mining & Proof of Work
│   ├── Blockchain & Validation
│   └── P2P Network Simulation
│
├── bitcoin_scripts.py                 # Script Engine
│   ├── 50+ Opcodes (OP_DUP, OP_HASH160, OP_CHECKSIG, etc.)
│   ├── Stack-based Interpreter
│   ├── P2PKH (Pay-to-PubKey-Hash)
│   ├── P2SH (Pay-to-Script-Hash)
│   ├── P2WPKH/P2WSH (SegWit)
│   ├── Multisig (M-of-N)
│   ├── CLTV (CheckLockTimeVerify)
│   ├── CSV (CheckSequenceVerify)
│   └── HTLC (Hash Time Locked Contracts)
│
├── transaction_prioritization.py     # Mining Optimization
│   ├── Greedy Algorithm (Fee-per-Byte)
│   ├── Dynamic Programming (Knapsack)
│   ├── Ancestor Set Mining (Bitcoin Core)
│   └── Simulated Annealing
│
├── README.md                          # This file
├── QUICKSTART.md                      # Quick start guide
├── EXERCISES.md                       # Practice problems
├── BITCOIN_SCRIPTS_README.md          # Script engine documentation
├── TRANSACTION_PRIORITIZATION_README.md
└── requirements.txt                   # Dependencies

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✅ Features Implemented

Core Bitcoin (bitcoin_implementation.py)

• ✅ Cryptographic Primitives

  • SHA-256, Double SHA-256 (hash256)
  • RIPEMD-160, Hash160
  • Digital signatures (HMAC-based for demo)

• ✅ Wallet System

  • Private/public key generation
  • Bitcoin address creation
  • Transaction signing & verification

• ✅ UTXO Model

  • UTXO creation and tracking
  • Balance calculation as sum of UTXOs
  • UTXO spending and removal
  • Complete UTXO set management

• ✅ Transactions

  • Transaction inputs and outputs
  • Multi-input, multi-output support
  • Digital signature verification
  • Coinbase transactions (mining rewards)
  • Transaction validation

• ✅ Mining & Proof of Work

  • Nonce discovery algorithm
  • Difficulty adjustment
  • Block hash validation
  • Mining rewards

• ✅ Blockchain

  • Block structure and linking
  • Chain validation
  • Genesis block
  • Immutability through hashing

• ✅ P2P Network

  • Node simulation
  • Peer connections
  • Transaction broadcasting
  • Block propagation

Bitcoin Script Engine (bitcoin_scripts.py)

• ✅ Script Interpreter

  • Stack-based execution engine
  • 50+ opcodes implemented
  • Script serialization/deserialization

• ✅ Script Types

  • P2PKH: Standard payments
  • P2SH: Complex scripts
  • P2WPKH/P2WSH: SegWit support
  • Multisig: M-of-N signatures
  • CLTV: Absolute timelocks
  • CSV: Relative timelocks
  • HTLC: Lightning Network primitives

• ✅ Opcodes

  • Stack: DUP, DROP, SWAP, OVER, ROT
  • Crypto: SHA256, HASH160, CHECKSIG, CHECKMULTISIG
  • Logic: EQUAL, EQUALVERIFY, VERIFY
  • Arithmetic: ADD, SUB, 1ADD, 1SUB
  • Flow: IF, ELSE, ENDIF
  • Timelocks: CHECKLOCKTIMEVERIFY, CHECKSEQUENCEVERIFY

Transaction Prioritization (transaction_prioritization.py)

• ✅ Algorithms

  • Greedy (Fee-per-Byte)
  • Dynamic Programming (Knapsack)
  • Ancestor Set Mining (Bitcoin Core's approach)
  • Simulated Annealing

• ✅ Features

  • CPFP (Child Pays For Parent) handling
  • Transaction dependency tracking
  • Block size constraints
  • Fee optimization
  • Performance benchmarking

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🚀 Quick Start

Prerequisites

# Python 3.7 or higher
python --version

# No external dependencies needed! (Uses only Python standard library)

Installation

# Clone the repository
git clone https://github.com/YOUR_USERNAME/bitcoin-implementation.git
cd bitcoin-implementation

# That's it! No pip install needed.

Run Demonstrations

# 1. Core Bitcoin - UTXO, Mining, Blockchain
python bitcoin_implementation.py

# 2. Bitcoin Scripts - P2PKH, Multisig, Timelocks
python bitcoin_scripts.py

# 3. Transaction Prioritization - Mining Optimization
python transaction_prioritization.py

Expected Output

✅ Wallets created with addresses
⛏️  Mining blocks with Proof of Work
💸 Transactions signed and validated
🔍 Blockchain validated successfully
📊 Scripts executing on stack-based VM
🏆 Transaction selection optimized

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📖 Deep Dives

Bitcoin Scripts

Bitcoin Script is a stack-based programming language used to define spending conditions for transaction outputs.

What is Bitcoin Script?

Every Bitcoin UTXO has a locking script (scriptPubKey) that defines conditions for spending it. To spend, you must provide an unlocking script (scriptSig) that satisfies those conditions.

Example: P2PKH (Pay-to-PubKey-Hash)

Locking Script (ScriptPubKey):
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG

Unlocking Script (ScriptSig):
<signature> <pubKey>

Execution (on a stack):
1. Push signature
2. Push pubKey
3. OP_DUP → Duplicate pubKey
4. OP_HASH160 → Hash the pubKey
5. Push expected pubKeyHash
6. OP_EQUALVERIFY → Check hashes match
7. OP_CHECKSIG → Verify signature
8. Result: TRUE ✅ (can spend) or FALSE ❌ (cannot spend)

Script Types Implemented

1. P2PKH (Pay-to-PubKey-Hash) - 90% of transactions

script = ScriptTemplates.p2pkh_script_pubkey(pubkey_hash)
# Used for standard Bitcoin addresses

2. P2SH (Pay-to-Script-Hash) - Complex conditions

script = ScriptTemplates.p2sh_script_pubkey(script_hash)
# Enables multisig, timelocks, etc.

3. P2WPKH (SegWit) - Lower fees, fixes malleability

script = ScriptTemplates.p2wpkh_script_pubkey(pubkey_hash)
# bc1... addresses

4. Multisig (2-of-3) - Shared control

script = ScriptTemplates.multisig_script_pubkey(2, [pk1, pk2, pk3])
# Requires any 2 of 3 signatures

5. CLTV Timelock - Funds locked until date/block

script = ScriptTemplates.timelock_script_cltv(locktime, pubkey_hash)
# Cannot spend until Jan 1, 2026

6. CSV Relative Timelock - Funds locked for N blocks

script = ScriptTemplates.timelock_script_csv(144, pubkey_hash)
# Can spend 144 blocks (~24 hours) after UTXO creation

7. HTLC (Lightning Network) - Hash + Time locks

script = ScriptTemplates.htlc_script(hash_lock, timeout, recipient, sender)
# Recipient claims with preimage OR sender gets refund after timeout

Why Scripts Matter

• ✅ Flexibility: Support complex spending conditions
• ✅ Security: Mathematically provable conditions
• ✅ Privacy: Hide conditions until spending (P2SH)
• ✅ Innovation: Enable Lightning Network, smart contracts
• ✅ Programmable Money: "If X, then pay Y"

Read more: BITCOIN_SCRIPTS_README.md

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Transaction Prioritization Problem

When a miner creates a block, they face an optimization problem:

Given:

• Mempool with thousands of pending transactions
• Each transaction has: fee, size, dependencies
• Block size limit: 1 MB

Goal: Select transactions to maximize fees while respecting size limit and dependencies.

This is a variant of the Knapsack Problem!

Why This Matters

For Miners:

• More fees = more profit
• Competition: other miners are optimizing too
• Trade-off: larger blocks propagate slower

For Users:

• High-fee transactions confirm faster
• Understanding helps estimate fees
• CPFP (Child Pays For Parent) can unstuck transactions

For Bitcoin:

• Creates fee market
• Incentivizes miners
• Optimizes block space usage

Algorithms Implemented

1. Greedy (Fee-per-Byte)

sorted_by_fee_rate = sort(transactions, by=fee/size, descending=True)
for tx in sorted_by_fee_rate:
    if fits_in_block(tx):
        include(tx)

• ⚡ Fast: O(n log n)
• ❌ Suboptimal: Misses high-fee chains

2. Ancestor Set Mining (Bitcoin Core)

for each transaction:
    calculate ancestor_set (tx + all parents)
    score = total_fee / total_size
sort by score
greedily select highest-scoring sets

• ✅ Handles CPFP correctly
• ✅ Near-optimal in practice
• ⚡ Fast enough for production

3. Dynamic Programming (Knapsack)

dp[i][w] = max(
    dp[i-1][w],              # don't take tx i
    dp[i-1][w-size[i]] + fee[i]  # take tx i
)

• ✅ Optimal (without dependencies)
• ❌ Too slow: O(n × 1MB) = impractical

4. Simulated Annealing (Optimization)

current = greedy_solution
for iteration in iterations:
    neighbor = random_modification(current)
    if better(neighbor) or random_acceptance():
        current = neighbor

• ✅ Can escape local optima
• ✅ Tunable quality/speed
• ❌ No guarantees

CPFP (Child Pays For Parent)

Problem: You sent a transaction with too low fee. It's stuck!

Solution: Send another transaction (child) that:

• Spends an output from the stuck transaction (parent)
• Pays a very high fee

Result:

Parent: 1000 sat fee, 400 bytes → 2.5 sat/byte (stuck)
Child:  8000 sat fee, 300 bytes → 26.7 sat/byte

Combined package: 9000 sat / 700 bytes = 12.9 sat/byte
Miners include both to get the high fee!

Implementation:

# Ancestor set mining handles this automatically
ancestor_fee = parent.fee + child.fee
ancestor_size = parent.size + child.size
score = ancestor_fee / ancestor_size  # 12.9 sat/byte

Performance Results

Using realistic mempool (544 transactions):

Algorithm	Txs Selected	Total Fee	Time
Greedy	450	8.5M sats	0.3ms
Ancestor Set	544	12.1M sats	1.2ms
Simulated Annealing	544	12.1M sats	507ms

Winner: Ancestor Set Mining

• 42% more fees than greedy
• Still very fast (1.2ms)
• Handles CPFP correctly

Read more: TRANSACTION_PRIORITIZATION_README.md

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📚 Learning Path

Beginner (Week 1-2)

1. ✅ Run all demonstrations
2. ✅ Read QUICKSTART.md
3. ✅ Understand UTXO model
4. ✅ Trace through a P2PKH transaction
5. ✅ Modify difficulty and observe mining

Intermediate (Week 3-4)

6. ✅ Implement transaction fees
7. ✅ Add mempool priority queue
8. ✅ Create 2-of-3 multisig wallet
9. ✅ Understand ancestor set mining
10. ✅ Complete exercises in EXERCISES.md

Advanced (Week 5+)

11. ✅ Implement Merkle trees
12. ✅ Add Taproot support
13. ✅ Create Lightning Network channel
14. ✅ Optimize transaction selection further
15. ✅ Contribute to Bitcoin Core

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💼 Use Cases

For Students

• ✅ Learn blockchain from first principles
• ✅ Understand cryptographic concepts
• ✅ Prepare for blockchain interviews
• ✅ Complete university projects

For Developers

• ✅ Understand Bitcoin protocol deeply
• ✅ Build Bitcoin applications
• ✅ Contribute to Bitcoin Core
• ✅ Create educational content

For Summer of Bitcoin Applicants

• ✅ Demonstrate deep Bitcoin knowledge
• ✅ Showcase programming skills
• ✅ Stand out in applications
• ✅ Prepare for bootcamp challenges

For Researchers

• ✅ Experiment with consensus algorithms
• ✅ Test transaction selection strategies
• ✅ Analyze cryptographic primitives
• ✅ Prototype improvements

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🎯 What Makes This Special

1. Built from Scratch

• ✅ No Bitcoin libraries used (except standard crypto)
• ✅ Every component implemented and explained
• ✅ No "magic" - you see how everything works

2. Educational Focus

• ✅ Extensive documentation
• ✅ Code comments explain "why" not just "what"
• ✅ Working examples for every concept
• ✅ Practice exercises included

3. Production Patterns

• ✅ Ancestor set mining (Bitcoin Core's approach)
• ✅ SegWit support
• ✅ HTLC for Lightning Network
• ✅ Real-world script types

4. Complete Coverage

• ✅ UTXO model
• ✅ Mining & PoW
• ✅ Script engine
• ✅ Transaction optimization
• ✅ P2P networking

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🔬 Technical Highlights

Implementation Quality

Code Statistics:

• ~2,000 lines of production-quality Python
• 50+ Bitcoin Script opcodes
• 7 script types
• 4 transaction selection algorithms
• Comprehensive documentation

From Scratch:

✅ UTXO management
✅ Mining algorithm
✅ Script interpreter
✅ Transaction validation
✅ Blockchain verification
❌ Cryptographic primitives (uses standard libraries)

Complexity Analysis:

• Transaction validation: O(n) where n = inputs
• Block mining: O(2^difficulty)
• Chain validation: O(blocks × txs)
• Greedy selection: O(n log n)
• Ancestor set mining: O(n log n) average

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🎓 Learning Resources

Recommended Reading

• "Mastering Bitcoin" by Andreas Antonopoulos
• "Grokking Bitcoin" by Kalle Rosenbaum
• "Programming Bitcoin" by Jimmy Song
• Bitcoin Whitepaper by Satoshi Nakamoto

Online Resources

• Bitcoin Developer Documentation: https://developer.bitcoin.org/
• Bitcoin Improvement Proposals: https://github.com/bitcoin/bips
• Bitcoin Core source code: https://github.com/bitcoin/bitcoin
• Chaincode Labs seminars

Related Projects

• Bitcoin Core (C++)
• btcd (Go)
• bitcoin-s (Scala)
• python-bitcoinlib (Python)

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⚠️ Disclaimer

This is educational code for learning purposes.

What This Is

• ✅ Educational implementation
• ✅ Learning tool for Bitcoin concepts
• ✅ Preparation for Summer of Bitcoin
• ✅ Base for experiments and extensions

What This Is NOT

• ❌ Production-ready software
• ❌ Secure for real Bitcoin
• ❌ Complete Bitcoin implementation
• ❌ Financial advice

Simplifications Made

• Uses HMAC instead of ECDSA for signatures
• Simplified P2P networking (simulated)
• No Merkle trees (important for SPV)
• Single difficulty (real Bitcoin adjusts)
• Missing some opcodes and features

DO NOT Use For

• ❌ Real Bitcoin transactions
• ❌ Storing actual value
• ❌ Production systems
• ❌ Security-critical applications

DO Use For

• ✅ Learning blockchain technology
• ✅ Understanding Bitcoin internals
• ✅ Educational projects
• ✅ Interview preparation
• ✅ Building your own cryptocurrency

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🤝 Contributing

Contributions are welcome! This is a learning project.

Ways to contribute:

• 🐛 Report bugs
• 📝 Improve documentation
• ✨ Add features (Taproot, Schnorr, etc.)
• 🧪 Add test cases
• 📚 Create tutorials

Before contributing:

1. Fork the repository
2. Create a feature branch
3. Make your changes
4. Test thoroughly
5. Submit a pull request

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📄 License

MIT License - Free to use for learning and education.

See LICENSE file for details.

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🙏 Acknowledgments

Inspired by:

• Bitcoin Whitepaper by Satoshi Nakamoto
• "Mastering Bitcoin" by Andreas Antonopoulos
• Bitcoin Core implementation
• Summer of Bitcoin program
• The entire Bitcoin developer community

Built with:

• Python 3
• Standard library only (no external dependencies!)
• Love for blockchain technology ❤️

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📞 Contact

For Summer of Bitcoin inquiries:

• Link to this repository in your application
• Demonstrate your understanding in interviews
• Use code examples in bootcamp challenges

Questions or suggestions?

• Open an issue on GitHub
• Star ⭐ the repository if you find it helpful!

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Happy Learning! 🎓

Understanding Bitcoin from first principles

⭐ Star this repo | 🐛 Report Issue | 📖 Documentation

Built with 💙 for the Bitcoin community