How Bitcoin Transactions Work

How Bitcoin Transactions Work

BitcoinВ was created to function asВ peer-to-peer electronic cash. WhetherВ you are spending or accepting bitcoin as payment it is prudent to understand how a transaction works.

Bitcoin transactions are messages, like email, which are digitally signed using cryptography and sent to the entire Bitcoin Network for verification. Transactions are public and can be found on the digital ledger known as the blockchain. The history of each and every bitcoin transaction leads back to the point where the bitcoins were very first produced.

Bitcoins Exist as Records of Bitcoin Transactions

We define aВ [bitcoin] as a chain of digital signatures. Each possessor transfers [bitcoin]В to the

next by digitally signing a hash of the previous transaction and the public key of the next proprietor

and adding these to the end of the coin. A payee can verify the signatures to verify the chain of

It’s worth mentioning here that Bitcoins do not “exist” per se. В That’s right! Those BTC in your walletВ doВ not explicitly exist the way cash, coins, or even stocks do. There are no physical bitcoins anywhere—not on a hard-drive, or a spreadsheet, or a bank account, and not evenВ a server somewhere.

Think of the blockchain as a record of the transactions inbetween various bitcoin addresses. These transaction records are updated by the Bitcoin network and collective across each of its knots as balances increase and decrease. You can even use one of our Bitcoin.comВ toolsВ if you want to see the history as well as current balance of any given bitcoin address.

Simply come in a bitcoin address to explore its entire history.

A Sample Bitcoin Transaction

Mark wants to send some bitcoin to Jessica. Essentially, a bitcoin transaction is comprised of three parts:

An input: This is a record of the bitcoin address from which Mark originally received the bitcoin he wants to send to Jessica.

An amount: This is the specific amount of BTC Mark wants to send Jessica.

An output: This is Jessica’s public key; also known as her ‘bitcoin address’

How Does a Bitcoin Transaction Work?

Sending bitcoin requires having access to the public and private keys associated with that amount of bitcoin.

Photo: Bitcoin: A Peer-to-Peer Electronic Cash System by S. Nakamoto

When we talk about someone “having bitcoins” what we actually mean is that person has access to a key-pair comprised of:

  • a public key to which some amount bitcoin was previously sent
  • the corresponding unique private key which authorizes the BTC previously sent to the above pub-key to be sent elsewhere

Public keys, also called a bitcoin addresses, areВ random sequences of letters and numbers that function similarly to an email address or В a social-media site username. They are public so you are safe sharing it with others. In fact, you must give your bitcoin addressВ to others whenever you want them to send you BTC.

The private key is another sequence of letters and numbers. However, private keys—like passwords to email or other accounts, are to be kept secret. Never share your private key with anyone that you do not 100% trust to not steal from you, ever. Also, reminisce to backup private keys with pen and paper and store them somewhere safe.

Your bitcoin address is basically a semitransparent safe. Others can see what’s inwards but only those with the private key can unlock the safe to access the funds within.

In our example transaction above, Mark wants to send some bitcoin to Jessica. To do this, he uses his private key to sign a message with the transaction-specific details. This message is then sent to the blockchain and contains an:

  • input: the source transaction of the coins previously sent to Mark’s address
  • amount:В some amount of BTC to be sent from Mark to Jessica
  • output: Jessica’s public address.

This transaction is then broadcast to the bitcoin network where miners verify that Mark’s keys are able to access the inputs (i.e. the address(s) from where he previously received BTC) he claims to control. This confirmation process is known as mining because it requiresВ resource-intensive computational labor and prizes miners, in BTC, per block solved. This is also the process by which fresh Bitcoins are ‘created’.

Why Do Some Bitcoin Transaction Confirmations Take So Long?

All bitcoin transactions must be verified by miners on the blockchain. Note, miners do not mine transactions; they mine blocks which are collections of transactions. Sometimes your transaction gets left out of the current block and gets put on hold until the next one is assembled. The bitcoin protocol dynamically adjusts requirements to have each block take approximately ten minutes to mine.

Another reason for long confirmation times is that blocks are limited to 1MB by the current bitcoin protocol. This arbitrary limit can be enhanced but for the present it thresholds the amount of transactions that may come in a block which effectively slows down confirmation times and by extension, the entire bitcoin network.

More About Bitcoin Transaction Inputs and Outputs

Albeit it would be possible to treat coins individually, it would be unwieldy to make a

separate transaction for every cent in a transfer. To permit value to be split and combined,

transactions contain numerous inputs and outputs. Normally there will be either a single input

from a larger previous transaction or numerous inputs combining smaller amounts, and at most twoВ outputs: one for the payment, and one returning the switch, if any, back to the sender

Recall how bitcoins only ‘exist’ as records of transactions on the blockchain? This means that sometimes numerous transactions end up being pinnedВ to a particular bitcoin address.

Let’s say you have two BTC in your wallet. These two BTC came from four different friends who each sent you .Five BTC for your bday. For convenience, your wallet interface will display your holdings as, “Two BTC”.В But, your wallet did not ‘add up’ each of those .Five BTC inputs into two BTC within your wallet. Rather, your wallet just keeps track of the four .Five BTC transactions separately, which total two BTC.

When you want to buy something with bitcoin your wallet uses transaction records of varying amounts that add up to the amountВ of bitcoin you wish to spend.

Suppose that number is .25 BTC and you want to use it to buy clothes from a merchant. Based of the info above about your holdings, we know you don’t have a single input with exactly .25 BTC. Bitcoin users cannot split a transaction into smaller amounts and only the entire output of a transaction can be spent.

So, when you open your wallet and type, “.25” in the amount field what technically happens is that one of the .Five BTC transactions (from your generous friend, Chris) will be sent, in its entirety. The difference is then returned via a fresh transaction. Here is the technical process violated down:

  • The amount owed for your clothing is .25 BTC
  • You ‘send’ the .Five BTC input to the store. (Reminisce, inputs must be spent in their entirety).
  • The clothing store’s bitcoin address is the output

But, your wallet actually creates two outputs for this transaction:

  1. .25В BTC to the clothing merchant
  2. .25 BTC to a fresh address created by your wallet to receive the ‘switch’ from the merchant.

This might seem confusing— the good news is that knowing this stuff is not required to send or receive bitcoin.

How Much Are Bitcoin Transaction Fees?

Bitcoin transaction fees are calculated using a multiplicity ofВ factors. ManyВ wallets permit users to manuallyВ set transaction fees. В Any portion of a transaction that isn’t owed to the recipient or returned as ‘switch’ is includedВ as a fee. Fees go to miners and can be used to increase speed on confirmation by incentivizing miners to prioritize your transaction(s).

Why Did I Learn This Stuff?!

The relation betweenВ transactions, miners, and blocks is a fundamental aspect of the Bitcoin protocol.В It is significant to understand the basics of sending and receiving Bitcoin so that things like confirmation time and fees make sense.

How Bitcoin Transactions Work

How Bitcoin Transactions Work

BitcoinВ was created to function asВ peer-to-peer electronic cash. WhetherВ you are spending or accepting bitcoin as payment it is prudent to understand how a transaction works.

Bitcoin transactions are messages, like email, which are digitally signed using cryptography and sent to the entire Bitcoin Network for verification. Transactions are public and can be found on the digital ledger known as the blockchain. The history of each and every bitcoin transaction leads back to the point where the bitcoins were very first produced.

Bitcoins Exist as Records of Bitcoin Transactions

We define aВ [bitcoin] as a chain of digital signatures. Each possessor transfers [bitcoin]В to the

next by digitally signing a hash of the previous transaction and the public key of the next possessor

and adding these to the end of the coin. A payee can verify the signatures to verify the chain of

It’s worth mentioning here that Bitcoins do not “exist” per se. В That’s right! Those BTC in your walletВ doВ not explicitly exist the way cash, coins, or even stocks do. There are no physical bitcoins anywhere—not on a hard-drive, or a spreadsheet, or a bank account, and not evenВ a server somewhere.

Think of the blockchain as a record of the transactions inbetween various bitcoin addresses. These transaction records are updated by the Bitcoin network and collective across each of its knots as balances increase and decrease. You can even use one of our Bitcoin.comВ toolsВ if you want to see the history as well as current balance of any given bitcoin address.

Simply inject a bitcoin address to explore its entire history.

A Sample Bitcoin Transaction

Mark wants to send some bitcoin to Jessica. Essentially, a bitcoin transaction is comprised of three parts:

An input: This is a record of the bitcoin address from which Mark primarily received the bitcoin he wants to send to Jessica.

An amount: This is the specific amount of BTC Mark wants to send Jessica.

An output: This is Jessica’s public key; also known as her ‘bitcoin address’

How Does a Bitcoin Transaction Work?

Sending bitcoin requires having access to the public and private keys associated with that amount of bitcoin.

Pic: Bitcoin: A Peer-to-Peer Electronic Cash System by S. Nakamoto

When we talk about someone “having bitcoins” what we actually mean is that person has access to a key-pair comprised of:

  • a public key to which some amount bitcoin was previously sent
  • the corresponding unique private key which authorizes the BTC previously sent to the above pub-key to be sent elsewhere

Public keys, also called a bitcoin addresses, areВ random sequences of letters and numbers that function similarly to an email address or В a social-media site username. They are public so you are safe sharing it with others. In fact, you must give your bitcoin addressВ to others whenever you want them to send you BTC.

The private key is another sequence of letters and numbers. However, private keys—like passwords to email or other accounts, are to be kept secret. Never share your private key with anyone that you do not 100% trust to not steal from you, ever. Also, recall to backup private keys with pen and paper and store them somewhere safe.

Your bitcoin address is basically a semi-transparent safe. Others can see what’s inwards but only those with the private key can unlock the safe to access the funds within.

In our example transaction above, Mark wants to send some bitcoin to Jessica. To do this, he uses his private key to sign a message with the transaction-specific details. This message is then sent to the blockchain and contains an:

  • input: the source transaction of the coins previously sent to Mark’s address
  • amount:В some amount of BTC to be sent from Mark to Jessica
  • output: Jessica’s public address.

This transaction is then broadcast to the bitcoin network where miners verify that Mark’s keys are able to access the inputs (i.e. the address(s) from where he previously received BTC) he claims to control. This confirmation process is known as mining because it requiresВ resource-intensive computational labor and prizes miners, in BTC, per block solved. This is also the process by which fresh Bitcoins are ‘created’.

Why Do Some Bitcoin Transaction Confirmations Take So Long?

All bitcoin transactions must be verified by miners on the blockchain. Note, miners do not mine transactions; they mine blocks which are collections of transactions. Sometimes your transaction gets left out of the current block and gets put on hold until the next one is assembled. The bitcoin protocol dynamically adjusts requirements to have each block take approximately ten minutes to mine.

Another reason for long confirmation times is that blocks are limited to 1MB by the current bitcoin protocol. This arbitrary limit can be enlargened but for the present it boundaries the amount of transactions that may inject a block which effectively slows down confirmation times and by extension, the entire bitcoin network.

More About Bitcoin Transaction Inputs and Outputs

Albeit it would be possible to treat coins individually, it would be unwieldy to make a

separate transaction for every cent in a transfer. To permit value to be split and combined,

transactions contain numerous inputs and outputs. Normally there will be either a single input

from a larger previous transaction or numerous inputs combining smaller amounts, and at most twoВ outputs: one for the payment, and one returning the switch, if any, back to the sender

Reminisce how bitcoins only ‘exist’ as records of transactions on the blockchain? This means that sometimes numerous transactions end up being pinnedВ to a particular bitcoin address.

Let’s say you have two BTC in your wallet. These two BTC came from four different friends who each sent you .Five BTC for your bday. For convenience, your wallet interface will display your holdings as, “Two BTC”.В But, your wallet did not ‘add up’ each of those .Five BTC inputs into two BTC within your wallet. Rather, your wallet just keeps track of the four .Five BTC transactions separately, which total two BTC.

When you want to buy something with bitcoin your wallet uses transaction records of varying amounts that add up to the amountВ of bitcoin you wish to spend.

Suppose that number is .25 BTC and you want to use it to buy clothes from a merchant. Based of the info above about your holdings, we know you don’t have a single input with exactly .25 BTC. Bitcoin users cannot split a transaction into smaller amounts and only the entire output of a transaction can be spent.

So, when you open your wallet and type, “.25” in the amount field what technically happens is that one of the .Five BTC transactions (from your generous friend, Chris) will be sent, in its entirety. The difference is then returned via a fresh transaction. Here is the technical process violated down:

  • The amount owed for your clothing is .25 BTC
  • You ‘send’ the .Five BTC input to the store. (Reminisce, inputs must be spent in their entirety).
  • The clothing store’s bitcoin address is the output

But, your wallet actually creates two outputs for this transaction:

  1. .25В BTC to the clothing merchant
  2. .25 BTC to a fresh address created by your wallet to receive the ‘switch’ from the merchant.

This might seem confusing— the good news is that knowing this stuff is not required to send or receive bitcoin.

How Much Are Bitcoin Transaction Fees?

Bitcoin transaction fees are calculated using a multitude ofВ factors. ManyВ wallets permit users to manuallyВ set transaction fees. В Any portion of a transaction that isn’t owed to the recipient or returned as ‘switch’ is includedВ as a fee. Fees go to miners and can be used to increase speed on confirmation by incentivizing miners to prioritize your transaction(s).

Why Did I Learn This Stuff?!

The relation betweenВ transactions, miners, and blocks is a fundamental aspect of the Bitcoin protocol.В It is significant to understand the basics of sending and receiving Bitcoin so that things like confirmation time and fees make sense.

How Bitcoin Transactions Work

How Bitcoin Transactions Work

BitcoinВ was created to function asВ peer-to-peer electronic cash. WhetherВ you are spending or accepting bitcoin as payment it is prudent to understand how a transaction works.

Bitcoin transactions are messages, like email, which are digitally signed using cryptography and sent to the entire Bitcoin Network for verification. Transactions are public and can be found on the digital ledger known as the blockchain. The history of each and every bitcoin transaction leads back to the point where the bitcoins were very first produced.

Bitcoins Exist as Records of Bitcoin Transactions

We define aВ [bitcoin] as a chain of digital signatures. Each proprietor transfers [bitcoin]В to the

next by digitally signing a hash of the previous transaction and the public key of the next holder

and adding these to the end of the coin. A payee can verify the signatures to verify the chain of

It’s worth mentioning here that Bitcoins do not “exist” per se. В That’s right! Those BTC in your walletВ doВ not explicitly exist the way cash, coins, or even stocks do. There are no physical bitcoins anywhere—not on a hard-drive, or a spreadsheet, or a bank account, and not evenВ a server somewhere.

Think of the blockchain as a record of the transactions inbetween various bitcoin addresses. These transaction records are updated by the Bitcoin network and collective across each of its knots as balances increase and decrease. You can even use one of our Bitcoin.comВ toolsВ if you want to see the history as well as current balance of any given bitcoin address.

Simply inject a bitcoin address to explore its entire history.

A Sample Bitcoin Transaction

Mark wants to send some bitcoin to Jessica. Essentially, a bitcoin transaction is comprised of three parts:

An input: This is a record of the bitcoin address from which Mark originally received the bitcoin he wants to send to Jessica.

An amount: This is the specific amount of BTC Mark wants to send Jessica.

An output: This is Jessica’s public key; also known as her ‘bitcoin address’

How Does a Bitcoin Transaction Work?

Sending bitcoin requires having access to the public and private keys associated with that amount of bitcoin.

Photo: Bitcoin: A Peer-to-Peer Electronic Cash System by S. Nakamoto

When we talk about someone “having bitcoins” what we actually mean is that person has access to a key-pair comprised of:

  • a public key to which some amount bitcoin was previously sent
  • the corresponding unique private key which authorizes the BTC previously sent to the above pub-key to be sent elsewhere

Public keys, also called a bitcoin addresses, areВ random sequences of letters and numbers that function similarly to an email address or В a social-media site username. They are public so you are safe sharing it with others. In fact, you must give your bitcoin addressВ to others whenever you want them to send you BTC.

The private key is another sequence of letters and numbers. However, private keys—like passwords to email or other accounts, are to be kept secret. Never share your private key with anyone that you do not 100% trust to not steal from you, ever. Also, reminisce to backup private keys with pen and paper and store them somewhere safe.

Your bitcoin address is basically a see-through safe. Others can see what’s inwards but only those with the private key can unlock the safe to access the funds within.

In our example transaction above, Mark wants to send some bitcoin to Jessica. To do this, he uses his private key to sign a message with the transaction-specific details. This message is then sent to the blockchain and contains an:

  • input: the source transaction of the coins previously sent to Mark’s address
  • amount:В some amount of BTC to be sent from Mark to Jessica
  • output: Jessica’s public address.

This transaction is then broadcast to the bitcoin network where miners verify that Mark’s keys are able to access the inputs (i.e. the address(s) from where he previously received BTC) he claims to control. This confirmation process is known as mining because it requiresВ resource-intensive computational labor and prizes miners, in BTC, per block solved. This is also the process by which fresh Bitcoins are ‘created’.

Why Do Some Bitcoin Transaction Confirmations Take So Long?

All bitcoin transactions must be verified by miners on the blockchain. Note, miners do not mine transactions; they mine blocks which are collections of transactions. Sometimes your transaction gets left out of the current block and gets put on hold until the next one is assembled. The bitcoin protocol dynamically adjusts requirements to have each block take approximately ten minutes to mine.

Another reason for long confirmation times is that blocks are limited to 1MB by the current bitcoin protocol. This arbitrary limit can be enhanced but for the present it thresholds the amount of transactions that may inject a block which effectively slows down confirmation times and by extension, the entire bitcoin network.

More About Bitcoin Transaction Inputs and Outputs

Albeit it would be possible to treat coins individually, it would be unwieldy to make a

separate transaction for every cent in a transfer. To permit value to be split and combined,

transactions contain numerous inputs and outputs. Normally there will be either a single input

from a larger previous transaction or numerous inputs combining smaller amounts, and at most twoВ outputs: one for the payment, and one returning the switch, if any, back to the sender

Reminisce how bitcoins only ‘exist’ as records of transactions on the blockchain? This means that sometimes numerous transactions end up being pinnedВ to a particular bitcoin address.

Let’s say you have two BTC in your wallet. These two BTC came from four different friends who each sent you .Five BTC for your bday. For convenience, your wallet interface will display your holdings as, “Two BTC”.В But, your wallet did not ‘add up’ each of those .Five BTC inputs into two BTC within your wallet. Rather, your wallet just keeps track of the four .Five BTC transactions separately, which total two BTC.

When you want to buy something with bitcoin your wallet uses transaction records of varying amounts that add up to the amountВ of bitcoin you wish to spend.

Suppose that number is .25 BTC and you want to use it to buy clothes from a merchant. Based of the info above about your holdings, we know you don’t have a single input with exactly .25 BTC. Bitcoin users cannot split a transaction into smaller amounts and only the entire output of a transaction can be spent.

So, when you open your wallet and type, “.25” in the amount field what technically happens is that one of the .Five BTC transactions (from your generous friend, Chris) will be sent, in its entirety. The difference is then returned via a fresh transaction. Here is the technical process cracked down:

  • The amount owed for your clothing is .25 BTC
  • You ‘send’ the .Five BTC input to the store. (Recall, inputs must be spent in their entirety).
  • The clothing store’s bitcoin address is the output

But, your wallet actually creates two outputs for this transaction:

  1. .25В BTC to the clothing merchant
  2. .25 BTC to a fresh address created by your wallet to receive the ‘switch’ from the merchant.

This might seem confusing— the good news is that knowing this stuff is not required to send or receive bitcoin.

How Much Are Bitcoin Transaction Fees?

Bitcoin transaction fees are calculated using a multiplicity ofВ factors. ManyВ wallets permit users to manuallyВ set transaction fees. В Any portion of a transaction that isn’t owed to the recipient or returned as ‘switch’ is includedВ as a fee. Fees go to miners and can be used to increase speed on confirmation by incentivizing miners to prioritize your transaction(s).

Why Did I Learn This Stuff?!

The relation betweenВ transactions, miners, and blocks is a fundamental aspect of the Bitcoin protocol.В It is significant to understand the basics of sending and receiving Bitcoin so that things like confirmation time and fees make sense.

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