Bitcoin users can identify themselves using, for example, their public key or (more commonly) addresses, which are alphanumeric identifiers that are different from, but often related to the public key. Prior to 2012, the only type of address used in Bitcoin transactions was a pay-to-public-key-hash (P2PKH), whereas sending to a public key was referred to as pay-to-public key (P2PK).

When addresses are derived from public keys, each address has its associated private key that can be used to sign messages. Accordingly, given an address, a public key, a signature and a message, anyone can verify whether or not (a) the address was derived from the public key and (b) the signature and signed message are valid for that public key. It is these properties that allow Bitcoin users to transfer ownership of bitcoins they possess such that they can be independently verified, but without disclosing the real world identity of the individual with the private key.

In Bitcoin, a transaction can have multiple senders and recipients. Senders and recipients are identified using addresses, and the value being sent or received by each party is identified in bitcoins. Bitcoins are divisible, and can be divided to the eighth decimal place; i.e., the smallest amount it is possible to send is 1 x 10^-8 bitcoin (0.00000001).

A transaction contains, in its simplest form, an input corresponding to the sender and one output corresponding to the recipient. The transaction output (TXO) consists of the recipient’s address and the value of bitcoin sent to that address. A Bitcoin transaction also contains a digital signature from the sender, where the message being signed contains the rest of the information detailing the transaction. This allows peers on the network to verify the transaction, as they can look at the address, public key and signature to check that the public key aligns with the address and the signature verifies it.

As transactions are public, it is possible to check to see if the address was used before, to confirm that the address did in fact receive the number of bitcoin it is now spending. To prevent double spending, Bitcoin tracks which transaction outputs are unspent and allows only those unspent outputs to spend the coins they receive. Sometime in about 2011 or 2012, the term UTXO was introduced to refer to an unspent transaction output.

Moving beyond the simple example with one input and one output, transactions with multiple inputs function in the same way: each transaction input needs to specify its own distinct UTXO and valid signature on the transaction data. Transactions with multiple inputs do not necessarily have multiple senders, as they could just represent one sender spending the contents of multiple UTXOs associated with the same address.

Similarly, transactions can have multiple transaction outputs, where again there can be multiple distinct addresses (representing different recipients) or not. This latter type of transaction is needed to divide bitcoins, as again any bitcoins received in a transaction must be spent all at once. For example, if a user has 10 BTC associated with a UTXO and wants to send two bitcoins to another user, they can form a transaction with one input representing their 10 BTC UTXO (and a valid associated signature) and two outputs: one containing the address of the other user and receiving 2 BTC, and the other containing an address they control and receiving 8 BTC. In this way, a user can make change, just as happens when spending physical cash.