Bitcoin Network Explained: How It Works and Its Challenges

The Bitcoin network is a decentralized system that allows for peer-to-peer transactions without the need for intermediaries like banks. It's based on a complex system of cryptography and game theory.

At its core, the Bitcoin network is maintained by a network of computers around the world, known as nodes, which work together to validate and record transactions. These nodes are responsible for solving complex mathematical problems to verify transactions.

Each node on the network has a copy of the blockchain, a public ledger that contains a record of every transaction that has ever taken place on the network. This ledger is constantly updated and expanded as new transactions are added.

The Bitcoin network maintains a distributed public ledger called the blockchain, which records the ownership of all bitcoin. This ledger is decentralized, meaning no single entity controls it.

New transactions are grouped into blocks and added to the blockchain, which is made up of identical copies hosted on computers around the world called nodes. These nodes run the Bitcoin software and ensure the blockchain remains decentralized.

Each block contains a SHA-256 hash of the previous block, chaining them in chronological order, and is maintained by a peer-to-peer network. This process updates the blockchain across all nodes every 10 minutes on average, tracking bitcoin spending and ensuring each bitcoin is spent only once.

The blockchain is a decentralized system that operates without a central authority or single administrator. This means that anyone can create a new bitcoin address and transact without needing any approval.

The blockchain is implemented as an ordered list of blocks, with each block containing a SHA-256 hash of the previous block, chaining them in chronological order.

A new block is created every 10 minutes on average, updating the blockchain across all nodes without central oversight. This process tracks bitcoin spending, ensuring each bitcoin is spent only once.

Individual blocks, public addresses, and transactions within blocks are public information, and can be examined using a blockchain explorer.

The decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich Hayek's The Denationalisation of Money.

Friedrich Hayek advocated for a complete free market in the production, distribution, and management of money to end the monopoly of central banks.

The essence of the bitcoin ideology is to remove money from social, as well as governmental, control, as sociologist Nigel Dodd argues.

This idea initially attracted libertarians and anarchists who saw bitcoin as a way to create an online version of cash, free from interference from malicious governments or banks.

Economist Paul Krugman notes that cryptocurrencies like bitcoin are primarily used by bank skeptics and criminals.

The Bitcoin network is built on a peer-to-peer (P2P) network architecture, which means all computers in the network are equal and there are no special nodes with greater access.

This decentralized design allows the network to be resilient to hacking and other types of attacks, as an attack would need to take down all the computers in the network to destroy it.

The P2P network architecture is also open to the public, which is fitting for a decentralized digital cash system like Bitcoin.

The early Internet was also a P2P network, but today's Internet architecture is more hierarchical.

The Bitcoin network operates on a mesh network with a "flat" topology, where nodes interact with each other directly.

This flat topology is a key characteristic of P2P networks, where every node provides and consumes services at the same time with reciprocity as the incentive for participation.

The Bitcoin P2P protocol is derived from software made by Satoshi Nakamoto, and it's the foundation of the Bitcoin network.

The network nodes in a P2P network share the burden of providing shared networking services, which is a core design principle of Bitcoin.

The term "bitcoin network" refers to the collection of nodes running the bitcoin P2P protocol, and it's a decentralized system by design.

The Bitcoin network is more than just a topology choice, it's a reflection of the core characteristic of being a peer-to-peer digital cash system.

Mining is the process of validating transactions on the Bitcoin network. Miners compete to solve a computationally-intensive, proof of work puzzle to create a new block in the blockchain.

Miners use specialized hardware and software to solve the complex proof of work processes necessary to verify transactions. The first miner to find a solution that is accepted by a majority of miners is permitted to write a "block" of new transactions to the blockchain.

The difficulty of generating a block is deterministically adjusted based on the mining power on the network by changing the difficulty target, which is recalibrated every 2,016 blocks to maintain an average time of ten minutes between new blocks.

Miners who successfully find a new block can collect transaction fees from the included transactions and a set reward in bitcoins. To claim this reward, a special transaction called a coinbase is included in the block, with the miner as the payee.

Here's a breakdown of the mining process:

Mining is a crucial part of the Bitcoin network, as it's responsible for verifying and adding new transactions to the blockchain. Miners compete to solve a computationally-intensive, proof of work puzzle, which requires a miner to create a new block by taking all of the network's new and unconfirmed transactions, as well as information from the previous block, and "hash" them using the SHA-256 algorithm.

The puzzle requires a miner to guess a number called a "nonce" that, when entered together into SHA-256, will generate an output that satisfies the output threshold set by the Bitcoin protocol. This process is repeated until a miner finds a solution that meets the threshold, which is then broadcast to the network for verification.

Miners use specialized hardware and software to solve the complex proof of work processes necessary to verify transactions. Many mining nodes double as full nodes, so they maintain full copies of the blockchain. Other, lightweight mining nodes may participate in mining but don’t carry a copy of the full blockchain.

The difficulty of generating a block is deterministically adjusted based on the mining power on the network by changing the difficulty target, which is recalibrated every 2,016 blocks (approximately two weeks) to maintain an average time of ten minutes between new blocks. This process requires significant computational power and specialized hardware.

Here are the different types of nodes involved in the mining process:

Miners are rewarded for their work with a predetermined amount of newly minted bitcoin called the "block reward." This reward is halved every 210,000 blocks until ₿21 million, with new bitcoin issuance slated to end around 2140. Afterward, miners will only earn from transaction fees.

The mining process involves significant computational power and specialized hardware, which has led to concerns about the environmental impact of Bitcoin mining. According to a 2022 study, Bitcoin mining represented 0.4% of global electricity consumption.

Transaction pools are like a holding area for new Bitcoin transactions that still need to be verified. They're maintained by nodes on the Bitcoin network and contain temporary and unconfirmed transactions.

These transactions are known to the network but haven't been included in the blockchain yet, usually because they haven't been verified by a miner. For example, a node that holds a user's wallet will use the transaction pool to track incoming payments to the user's wallet that have been received on the network but are not yet confirmed.

Transactions are gradually added to the transaction pool as they're received and verified. They're then relayed to neighboring nodes to spread throughout the network and be verified.

Some nodes also maintain a separate pool of orphaned transactions, which are transactions that reference a transaction that's not yet known. These orphaned transactions are stored temporarily until the parent transaction arrives.

Here's a brief overview of the transaction pool process:

The transaction pool is stored in local memory and is not saved on persistent storage. It's dynamically populated from incoming network messages, and when a node starts, both pools are empty and are gradually populated with new transactions received on the network.

A block is the basic building block of the Bitcoin network. Each block is limited in size to one megabyte of data.

For Segregated Witness (SegWit) blocks, transaction data is limited to one megabyte, while signature data is segregated and limited to three megabytes. This keeps the block size at one megabyte while increasing block space for transaction data.

A block header is made up of six key components. Here's a breakdown of what each one is:

A block itself is also made up of several key components. Here's a breakdown of what each one is:

A transaction on the Bitcoin network is a complex process, but I'll break it down for you.

Here's a simplified overview of how a transaction takes place:

Here's a step-by-step look at how a transaction is verified:

1. The transaction is added to the transaction pool, a temporary list of unconfirmed transactions maintained by almost every node on the network.

2. The transaction is relayed to neighboring nodes to propagate on the network.

3. If a transaction's inputs refer to a transaction that is not yet known, it's stored temporarily in the orphan pool until the parent transaction arrives.

4. When a transaction is added to the transaction pool, the orphan pool is checked for any orphans that reference this transaction's outputs.

5. Any matching orphans are then validated and removed from the orphan pool, completing the chain of interdependent transactions.

The transaction pool and orphan pool are stored in local memory and are not saved on persistent storage, but the UTXO pool, which contains all unspent outputs on the blockchain, is stored on persistent storage and represents the emergent consensus of the network.

Bitcoin wallets are secure digital repositories that store personal keys, making it difficult for hackers to access your coins unless they have your key(s). A wallet can have multiple addresses, each with different amounts of BTC and change.

The Bitcoin network understands how to send coins between individuals through wallets, which create transaction inputs and outputs for each transaction. These inputs and outputs are recorded on the blockchain alongside other transaction details.

To store your coins safely, consider using a wallet with two-factor authentication, like CoinPayments, which allows you to store multiple cryptocurrencies on the same platform.

Inventory or information is exchanged between nodes on the Bitcoin network through a process of querying and comparing blockchain records. This process starts with a new node querying other terminals for blockchain records or attempting to build the blockchain from scratch.

A node will see the version messages from its peers, know how many blocks they each have, and be able to compare to how many blocks it has in its own blockchain. This comparison allows the node to determine which blocks it needs to retrieve from its peers.

The process of syncing the blockchain starts with the version message, which contains the BestHeight, a node's current blockchain height. A node will then exchange a getblocks message with its peers, containing the hash of the top block on its local blockchain.

Peered nodes will exchange inventory messages, which contain the hashes of the next 500 blocks in the chain. The node missing these blocks will then retrieve them by issuing a series of getdata messages, requesting the full block data and identifying the requested blocks using the hashes from the inventory message.

As the node catches up to the rest of the network, it will keep track of how many blocks are "in transit" per peer connection, ensuring that it doesn't overwhelm any peer with requests. This is done by checking that it doesn't exceed a limit of MAX_BLOCKS_IN_TRANSIT_PER_PEER.

Bitcoin wallets were the first cryptocurrency wallets, enabling users to store the information necessary to transact bitcoins.

The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client, was released in 2009 by Nakamoto as open-source software.

Bitcoin Core is among the best known clients. Forks of Bitcoin Core exist such as Bitcoin Unlimited.

Wallets can be full clients, with a full copy of the blockchain to check the validity of mined blocks, or lightweight clients, just to send and receive transactions without a local copy of the entire blockchain.

Third-party internet services called online wallets store users' credentials on their servers, making them susceptible of hacks.

Cold storage protects bitcoins from such hacks by keeping private keys offline, either through specialized hardware wallets or paper printouts.

Modern wallet software usually includes functions to combine or collapse addresses when necessary, which can help manage the multiple addresses that result from the quirk of the Bitcoin system.

Lots of Bitcoin wallets end up having tons of different addresses that include various amounts of BTC and change.

The Bitcoin network is incredibly secure thanks to its decentralized nature, cryptographic protocols, and complex algorithms that make it virtually impossible to hack.

Its blockchain network is completely digital, so there's no physical way to lock away information, but the decentralized system ensures that everyone on the network monitors and verifies transactions, making it resilient to hacking attacks.

A 51% attack is a risk, but the Bitcoin network has incentives in place to prevent it, such as scaling security with the price of bitcoin and making it expensive for a miner to acquire a majority of the network's processing power.

Miners are also heavily incentivized to play nice, as investing in customized hardware and chips to win the block reward is a costly and specialized pursuit that would be destroyed if they were to disrupt the network.

Blockchain security is a complex and robust system. It's based on a decentralized network where everyone verifies everyone else's transactions.

The blockchain network is completely digital, so there's no physical way to lock away information. However, its decentralized nature means that there's no centralized authority to preside over the network and its transactions.

Cryptographic protocols are used to ensure the privacy of personal information and the legitimacy of chain verification records. These protocols are so complex that even the most advanced supercomputers would take many centuries to break them by force.

The blockchain network is very resilient to hacking attacks because of its encrypted structure. It would be extremely difficult to compromise or cheat on the Bitcoin blockchain network.

Every transaction on the blockchain is public and can be viewed from multiple sources. This also means that the network doesn't have a centralized authority, and participants verify blocks of transaction data through mining.

The cost of mining creates digital scarcity and also helps secure the Bitcoin network. Miners are incentivized to stay honest and use valid transactions to avoid wasting their resources.

If a miner were to acquire a majority of the network's processing power, they could potentially carry out a 51% attack. However, the Bitcoin network's security scales with the price of bitcoin, making it more expensive for a miner to carry out such an attack.

Quantum computing is a potential threat to the public-key cryptography schemes used by Bitcoin. However, post-quantum cryptography already exists, and Bitcoin can be upgraded to use it if needed.

Mining centralization is a risk that has sparked debate in the Bitcoin community. Bitcoin mining has trended towards fewer, larger players due to its capital-intensive and specialized nature.

This trend doesn't necessarily pose a problem, as the structures of incentives make it profitable to play by the rules and prohibitively expensive to defect. However, if a majority of the network's hashrate ends up concentrating in one or a few jurisdictions, it increases the potential for a government or cooperating governments to meddle.

A government could potentially shut down miners within its reach, or coerce them into censoring transactions, which would detract from bitcoin's fungibility and permissionless promise.

A hard fork occurs when an existing blockchain splits into two different blockchains, resulting in two separate blockchains with distinct native digital asset tokens.

This can happen when an update is made to a protocol that not all of the nodes adopt, leading to a split in the network.

The Bitcoin community has experienced hard forks, including the Bitcoin Cash hard fork that occurred at block 661,647, which was a result of a disagreement around block size.

Hard forks result in two incompatible blockchains, with old nodes unable to read the new blockchain and vice versa.

The Bitcoin Cash fork, for example, adopted a block size of eight megabytes to increase transaction throughput, whereas Bitcoin kept a block size of one megabyte to foster greater node participation and ensure decentralization.

The Bitcoin network is capable of processing up to one megabyte of transaction data approximately every 10 minutes, but this design choice is driven by the belief that a lower block size results in more nodes participating in the network.

This has led to controversy and agitation in the Bitcoin community, with some arguing that increasing the block size is necessary to increase transaction throughput and reduce latency.

The possibility of hard forks is always present, as the community may disagree on design decisions in the future, leading to some portion of the community hard forking in dissent.

However, projects like the Lightning Network are working to increase Bitcoin's transaction throughput and reduce its latency while maintaining its decentralized nature, which could change the payment story of the Bitcoin network.

The history of bitcoin is marked by significant regulatory actions. In March 2013, the US Financial Crimes Enforcement Network (FinCEN) established guidelines for decentralized virtual currencies like bitcoin.

These guidelines classified American bitcoin miners who sell their generated bitcoins as money services businesses, subject to registration and other legal obligations. This move was a major turning point in the development of the bitcoin network.

The US authorities seized the unregistered exchange Mt. Gox in May 2013, and the value of bitcoin dropped significantly after the People's Bank of China prohibited Chinese financial institutions from using bitcoin in December 2013.

In March 2013, the US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin.

The guidelines classified American bitcoin miners who sell their generated bitcoins as money services businesses, subject to registration and other legal obligations.

In May 2013, US authorities seized the unregistered exchange Mt. Gox.

The first government agency to seize bitcoins was the US Drug Enforcement Administration, which took ₿11.02 in June 2013 from a man attempting to use them to buy illegal substances.

The FBI seized about ₿30,000 in October 2013 from Silk Road, following the arrest of its founder Ross Ulbricht.

In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoin.

This led to a drop in the value of bitcoin and Baidu no longer accepting bitcoins for certain services.

Buying real-world goods with any virtual currency had been illegal in China since at least 2009.

In 2017, an estimated 2.9 to 5.8 million unique users were using a cryptocurrency wallet, mostly with bitcoin.

The SegWit software upgrade was activated in August 2017, aiming to support the Lightning Network and improve scalability. However, this upgrade had opponents who supported larger blocks as a solution, leading to the creation of Bitcoin Cash.

China imposed a complete ban on bitcoin trading in February 2018, causing a price crash. This ban significantly reduced the percentage of bitcoin trading in the Chinese renminbi, from over 90% in September 2017 to less than 1% in June 2018.

Several hacks and thefts from cryptocurrency exchanges negatively affected bitcoin prices in 2018.

In 2020, some major companies and institutions started acquiring bitcoin as a treasury reserve asset, with MicroStrategy investing $250 million, Square, Inc. investing $50 million, and MassMutual investing $100 million. This marked a significant shift in the way companies view and invest in cryptocurrency.

In November 2020, PayPal added support for bitcoin in the US, making it easier for people to buy, sell, and hold the digital currency.

February 2021 saw bitcoin's market capitalization reach $1 trillion for the first time, demonstrating the growing value and popularity of the cryptocurrency.

The Taproot soft-fork upgrade was activated in November 2021, adding support for Schnorr signatures, improved functionality of smart contracts, and the Lightning Network.

In September 2021, bitcoin became legal tender in El Salvador, alongside the US dollar.

The first bitcoin futures exchange-traded fund (ETF), called BITO, was approved by the SEC and listed on the CME in October 2021.

May and June 2022 saw the bitcoin price fall following the collapses of TerraUSD and the Celsius Network, highlighting the risks and volatility of the cryptocurrency market.

By June 2023, River Financial estimated that bitcoin had 81.7 million users, about 1% of the global population.

In January 2024, the first 11 US spot bitcoin ETFs began trading, offering direct exposure to bitcoin for the first time on American stock exchanges.

December 2024 saw the bitcoin price reach $100,000 for the first time, as US president-elect Donald Trump promised to make the US the "crypto capital of the planet" and to stockpile bitcoin.

Bitcoin's value comes from its scarcity, people's perception of its value, and its decentralized nature, much like fiat currencies. Bitcoin's value is not backed by any government or centralized authority.

The unit of account in the bitcoin system is the bitcoin, represented by the symbol ₿ and the currency code BTC. However, the BTC code doesn't conform to ISO 4217, which is why XBT is used by Bloomberg L.P.

One bitcoin is divisible to eight decimal places, making it a highly precise and flexible unit of account.

The bitcoin system has a unit of account called a bitcoin, represented by the symbol ₿ and the currency code BTC.

However, the BTC code doesn't conform to ISO 4217, which is a global standard for currency codes. This is because BT is the country code for Bhutan.

One bitcoin is divisible to eight decimal places, making it a highly flexible unit of account.

The smallest unit of account is the satoshi, which represents one hundred millionth of a bitcoin.

Bitcoin's value originates from its scarcity, just like other forms of currency.

Fiat currencies like the dollar and euro have value because they're backed by their home countries' governments, but Bitcoin's value comes from its scarcity and the fact that it's not controllable by any government or centralized authority.

The value of Bitcoin is also influenced by people's perception of its worth, which is reflected in its ability to be traded for fiat currency or other valuable items.

The scarcity of Bitcoin is due to its limited supply, which will only increase as miners reach the Bitcoin cap and new coins are no longer minted.

This scarcity is a key factor in preventing inflation, a problem that other currencies can't truly claim to avoid.

Creating an address involves generating a random private key and then computing the corresponding address. This process is almost instant, but the reverse (finding the private key for a given address) is nearly impossible.

Publishing a bitcoin address does not risk its private key, and it is extremely unlikely to accidentally generate a used key with funds. To use bitcoins, owners need their private key to digitally sign transactions, which are verified by the network using the public key, keeping the private key secret.

Bitcoin transactions use a scripting language, involving one or more inputs and outputs. Each input must refer to a previous unspent output in the blockchain to prevent double-spending.

Here's a breakdown of a bitcoin transaction:

Creating a bitcoin address is a relatively simple process that involves generating a random private key and computing the corresponding address. This process is almost instant, but the reverse (finding the private key for a given address) is nearly impossible.

Publishing a bitcoin address does not risk its private key, and it's extremely unlikely to accidentally generate a used key with funds. This means you can share your address with others without worrying about compromising your private key.

To use bitcoins, owners need their private key to digitally sign transactions, which are verified by the network using the public key. This keeps the private key secret and secure.

Bitcoin transactions use a scripting language that involves one or more inputs and outputs. When sending bitcoins, a user specifies the recipients' addresses and the amount for each output.

Here's a breakdown of how a transaction works:

Losing a private key means losing access to the bitcoins, with no other proof of ownership accepted by the protocol.

SPV (Simplified Payment Verification) nodes are a great option for accessing the Bitcoin network without storing a full blockchain. They're perfect for power-constrained devices like smartphones or tablets.

SPV nodes are also known as lightweight nodes. They download block headers but don't download full transactions for each block. This makes them significantly smaller than full nodes.

SPV nodes rely on other peers and nodes to verify transactions. This is because they don't have the full blockchain record to check against.

The bitcoin network has its fair share of scalability and decentralization challenges. One major issue is the limited block size, which is capped at one megabyte. This can lead to delayed processing of transactions and increased fees.

Research has shown a trend towards centralization in bitcoin, where miners join pools for stable income. This can cause safety concerns, as seen in 2014 when mining pool Ghash.io reached 51% mining power. A single entity controlling more than 50% of the hashing power could potentially censor transactions and double-spend coins. Fortunately, Ghash.io voluntarily capped its power at 39.99% to benefit the network.

The Lightning Network is a potential scaling solution, a second-layer routing network that can help alleviate some of the pressure on the main network. However, a few entities still dominate other parts of the ecosystem, such as client software, online wallets, and simplified payment verification (SPV) clients.

Bitcoin's use cases are still evolving, but it's clear that it's not just a speculative asset, it's a real-world currency. Bitcoin has been used for large-item purchases on Overstock.com and for cross-border payments to freelancers.

Prices are rarely quoted in bitcoin, and trades often involve conversions into fiat currencies due to high costs, inability to process chargebacks, and high price volatility. This limits its use in everyday transactions.

As of 2022, a growing use of bitcoin was reported in the restaurant business, alongside cash and cards, despite associated risks and costs.

Bitcoin has been used for payments, but its adoption has been limited due to high costs, volatility, and long transaction times. Many merchants don't quote prices in bitcoin, instead converting trades into fiat currencies.

Some businesses, like Overstock.com, have accepted bitcoin for large-item purchases and cross-border payments to freelancers. Bloomberg reported on this trend in 2022.

In 2022, a growing use of bitcoin was reported in the restaurant business, alongside cash and cards. This trend suggests that bitcoin is being used for everyday transactions.

The Bitcoin Law made bitcoin legal tender in El Salvador in September 2021, alongside the US dollar. However, the adoption has been criticized internationally and within El Salvador.

The Central African Republic adopted bitcoin as legal tender in April 2022, but repealed the reform one year later. This shows that even governments are still figuring out how to use bitcoin effectively.

The Iranian government initially opposed cryptocurrencies but later saw them as an opportunity to circumvent sanctions. Since 2020, Iran has required local bitcoin miners to sell bitcoin to the Central Bank of Iran, allowing the central bank to use it for imports.

Bitcoin's recognition as a currency is a complex issue. It serves three purposes: a store of value, a medium of exchange, and a unit of account. However, it functions best as a medium of exchange, not as a store of value or unit of account.

The Economist noted in 2015 that bitcoins have three qualities useful in a currency: they are "hard to earn, limited in supply and easy to verify". But, a 2018 assessment stated that cryptocurrencies met none of these three criteria.

Regulators and economists have different opinions on bitcoin's potential. Robert J. Shiller wrote that bitcoin has potential as a unit of account for measuring the relative value of goods, but it doesn't solve any sensible economic problem in its current form.

Bitcoin's decentralized nature makes it difficult to regulate. François R. Velde described it as "an elegant solution to the problem of creating a digital currency".

The Bitcoin network is a decentralized system that allows for peer-to-peer transactions without the need for intermediaries.

The network was created by an individual or group of individuals using the pseudonym Satoshi Nakamoto.

Bitcoin's decentralized nature is maintained by a network of computers around the world that work together to validate transactions.

These computers, known as nodes, use complex algorithms to solve mathematical problems and verify the integrity of the network.

A new block of transactions is added to the public ledger, known as the blockchain, approximately every 10 minutes.

Each block contains a unique code, known as a hash, that connects it to the previous block, creating a permanent and unalterable record.

The bitcoin network has a built-in emergency broadcast system, known as alert messages, which allows the core developer team to send critical notifications to all users.

Alert messages are propagated rapidly across the network, verified by each node, and can even trigger user interface functions to display the alert.

The alert system has only been used a handful of times, most notably in early 2013 when a critical database bug caused a multiblock fork to occur in the bitcoin blockchain.

If you're a miner running a hardware-embedded system, you might not receive alert messages directly, but you can still subscribe to alerts via a mining pool operator or by running a lightweight node just for alert purposes.

The bitcoin Core client allows you to configure an alertnotify command to run when an alert is received, which can be set to generate an email message to the administrator of the node, containing the alert message.

A full blockchain node verifies a transaction by checking the entire chain of thousands of blocks below it to guarantee that the UTXO is not spent.

SPV nodes, on the other hand, check how deep the block is buried by a handful of blocks above it. They use a getheaders message to retrieve block headers from peers, which can send up to 2,000 block headers at a time.

The process of retrieving block headers is otherwise the same as for full nodes, but SPV nodes set a filter on the connection to peers to filter future blocks and transactions. Any transactions of interest are retrieved using a getdata request.

SPV nodes create a privacy risk because they need to retrieve specific transactions, which can inadvertently reveal the addresses in their wallet. This can be tracked by third parties monitoring the network.

Bloom filters were introduced to address the privacy risks of SPV nodes, allowing them to receive a subset of transactions without revealing which addresses they're interested in. This uses a filtering mechanism that relies on probabilities rather than fixed patterns.

Alert messages are a seldom used function, but are nevertheless implemented in most nodes. They serve as bitcoin’s “emergency broadcast system,” allowing the core developer team to send an emergency text message to all bitcoin nodes.

The alert system has only been used a handful of times, most notably in early 2013 when a critical database bug caused a multiblock fork to occur in the bitcoin blockchain. This highlights the importance of being prepared for emergencies.

Alert messages are propagated by the alert message itself. The alert message contains several fields, including a digital signature that ensures fake alerts will not be propagated on the network.

Each node receiving this alert message will verify it, check for expiration, and propagate it to all its peers, thus ensuring rapid propagation across the entire network. This ensures that all nodes are aware of the emergency situation.

In the Bitcoin Core client, the alert is configured with the command-line option -alertnotify. This option specifies a command to run when an alert is received, such as generating an email message to the administrator of the node.

Many hardware-embedded bitcoin mining systems do not implement the alert message function because they have no user interface. It is strongly recommended that miners running such mining systems subscribe to alerts via a mining pool operator or by running a lightweight node just for alert purposes.