BIP-68: Relative LockTime using nSequence

Bitcoin Has Two Types of Time-Based Transactions:

1. Relative LockTime:
   • Transaction is locked for a period after the input is confirmed
   • Example: “Spendable 100 blocks after confirmation.”
2. Absolute LockTime:
   • Transaction is locked until a specific time or block
   • Example: “Spendable after block 800,000.”

Understanding nSequence

How nSequence Works?

Bob wants to send Alice 10 BTC but wants to ensure she cannot spend it until 3 days after confirmation.

1. Initial Transaction:
   • Bob receives 10 BTC in a confirmed transaction.
2. Bob Creates a New Transaction:
   • He signs a transaction sending 10 BTC to Alice.
   • He sets nSequence = 3 days (~432 blocks).
3. Effect of nSequence:
   • Alice cannot spend the BTC before 3 days.
   • If she tries earlier, the network rejects the transaction.
   • After 3 days, Alice can spend the BTC freely.

How to Define a Sequence Number?

1. Disabled Flag (Bit 31)

• If set: BIP-68 is disabled, meaning nSequence has no effect.
• If not set: BIP-68 is enabled, allowing relative lock-time.

2. Type Flag (Bit 22)

• If set: The sequence number is interpreted as time-based (lock-time in seconds).
• If not set: The sequence number is block-based (lock-time in block height).
  

3. Value (Bits 0-15)

• Represents the actual relative lock-time value, either in blocks (if Type Flag is not set) or in time units (if Type Flag is set).