The Bitcoin whitepaper explained and commented: part 9 —Combining and Splitting Value
This is the 9th part of my series explaining Satoshi Nakamoto’s 2008 Bitcoin whitepaper. As previously, quotes and diagrams are from the whitepaper.
Section 9 — Combining and Splitting Value
OK, now we can breathe a little: this is probably the easiest section of the whitepaper. But let’s not get too excited: there is still some hidden subtleties!
This section is about to introduce the UTXOs, or Unspent Transaction Outputs, even though Satoshi doesn’t use this term at all, which is the base of Bitcoin’s accounting system:
Although it would be possible to handle coins individually, it would be unwieldy to make a separate transaction for every cent in a transfer. To allow value to be split and combined, transactions contain multiple inputs and outputs. Normally there will be either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and at most two outputs: one for the payment, and one returning the change, if any, back to the sender.
What Satoshi is describing here is what transactions (payments) look like. You may not be able to melt 5 “one dollar” bills into a single “five dollars” bill, but in Bitcoin you can: digital coins can be combine and split at will. Each transaction will burn some coins and split their combined value into one or several outputs.
For example, you can have the following transaction:
- Inputs: 5 btc + 2.23 btc + 2.1 btc (coins that are being burned)
- output: 8.5 btc + 0.83 btc (new coins that are being created)
A similar transaction is illustrated in the whitepaper: combining 3 inputs and splitting the total into 2 outputs (here a payment of 8.5 btc for example and a change of 0.83 btc)
Each input and output of this transaction would be later called a UTXO, an Unpent Transaction Output. A transaction burns some UTXOs (the inputs) and creates new ones (the outputs).
