zilong-dai / bitcoin-tx-tutorial

A technical tutorial for understanding how bitcoin transactions are created and signed

bitcoin-tx-tutorial

This repo contains a series of python jupyter-notebooks to explain how bitcoin transactions are created and signed. The notebooks will start up an instance of bitcoind in regtest mode so that transactions can be validated and broadcasted on regtest. Each notebook has some questions and exercises to test your understanding.

Prerequisite knowledge

• A high level understanding of the bitcoin. e.g. Mastering Bitcoin by Andreas Antonopoulos UTXO model, in particular Chapter 6.
• A conceptual understanding of hash functions.
• Hexadecimal notation and endianness.

Chapters

• Chapter 1: 'Legacy Transactions'
  • 'The First Bitcoin Transaction (Pay to Pubkey)'
  • 'P2PKH - Pay to Pubkey Hash'
  • 'P2SH - Pay to Script Hash (2-of-3 Mulitisig)'
• Chapter 2: 'Segwit v0'
  • 'P2WPKH - Pay to Witness Pubkey Hash'
  • 'P2WSH - Pay to Witness Script Hash (2-of-2 Multisig)'
• Chapter 3: 'Taproot'
  • 'Schnorr signatures and TapTweaks'
  • 'TapTrees'
  • 'P2TR - Key path and Script path spends'
• Chapter 4: 'Signature hashes'
  • 'Signature hash evolution'
  • 'Signature hash flags'
• Chapter 5: 'Timelocks'
  • 'Transaction-level timelocks'
  • 'Script-level timelocks'
• Appendix:
  • 'Elliptic Curve Math Review'
  • 'Hash Functions'
  • 'Bitcoin Script'
  • 'Addresses'

Setup

Python3

This project requires Python 3.6 (or greater) to be installed on your machine already. All other dependencies will be installed automatically with pip3.

To verify your Python version, run

python3 --version

If it is properly installed, you should see something like:

Python 3.9.13

To copy the repository to your local machine, it is recommended to use git but alternatively you can also download the files directly from GitHub, there are no further dependencies on git.

git clone https://github.com/DariusParvin/bitcoin-tx-tutorial
cd bitcoin-tx-tutorial

To create a virtual environment and install all dependencies:

python3 -m venv venv
source venv/bin/activate
pip3 install -r requirements.txt

Finally, to launch the interactive notebook:

jupyter notebook

Bitcoin core

The notebooks in this repo use bitcoin core's TestShell from its test framework. The TestShell is used to create a local test instance of a bitcoin node (and blockchain) against which we can test our manually created transactions. The notebooks in this repo have been tested with bitcoin core v24.0.1.

Useful resources

• bitcoin-tx-color-coder: A tool for decoding raw transactions. It color-codes and interprets the bytes, similar to the examples in this tutorial.
• BitcoinIDE: Allows testing of Bitcoin stack operations and script analysis. Useful for understanding script evaluations.

Acknowledgements

• This work wouldn't have been possible without the funding from chaincode.
• A lot of the code and inspiration for this tutorial comes from the following places:
  • Shlomi Zeltsinger's segwit tutorial
  • Jimmy Song's Programming Bitcoin exercises.
  • Bitcoin Optech Schnorr Taproot Workshop