How do Bitcoin Transactions Work?
What happens when one person sends a Bitcoin from one electronic wallet to another? Every single transaction is digitally signed for security, everyone on the network is informed and anyone can trace the history of the transaction right back to the point of when the Bitcoin was first produced. Today, most transactions are opaque, and we don’t really know where our money is going and what is happening with it, but the Bitcoin system is completely transparent.
So, let’s get down to how transactions work.
Like all digital currency including your Dollars and Riyals, Bitcoins don’t actually exist anywhere. There are only records of Bitcoin transactions.
A very uncomfortable thing for many to get over is that you can’t point to a physical object or even a digital file and call it a Bitcoin.
All there are records of transactions between different addresses or wallets with balances that decrease or increase. The blockchain which acts as a gigantic public ledger holds every transaction that’s ever taken place. You can work out the balance of any bitcoin address by simply reconstructing looking at the blockchain. Remember the address is simply a set of numbers so you’ll never know who it belongs to unless they have publicly revealed it as being theirs.
What does a Bitcoin transaction look like?
If Mo sends some Bitcoins to Ahmed, that transaction will have three key pieces of information:
1. Input. This is the data record of which Bitcoin address was used to send the Bitcoins to Mo in the first place (he received them from her friend, Abdul).
2. An amount. This is the number of Bitcoins that Mo is sending to Ahmed.
3. An output. This is Ahmed’s Bitcoin address.
How is it sent?
Two things are needed to send Bitcoins: A private key and a Bitcoin address. If you want a new Bitcoin address, it is simply a sequence of numbers and letters that is randomly generated. The private key is another sequence of numbers and letters, which must be kept secret, unlike your Bitcoin address.
A Bitcoin address can be viewed as a safe deposit box with a glass front. Anyone can see what’s in it but only the private key can unlock it to put things in it or take things out.
When Mo wants to send Bitcoins to Ahmed, he uses his private key to sign a message with the input (the source transaction(s) of the coins), amount, and output (Ahmed’s address).
He then sends them from his Bitcoin address out into the Bitcoin network. Then, Bitcoin miners verify the authenticity of the transaction, before it reaches Ahmed’s address.
Why must I sometimes wait for my transaction to clear?
Transactions need to be verified by miners which is why sometimes you have to wait till they’re done mining. Each block takes roughly 10 minutes to mine.
Sometimes merchants may make you wait until a block has been confirmed so you may have to take a coffee break before you can take advantage of the paid service or download the digital goods.
However, some merchants won’t make you wait until the transaction has been confirmed. This often happens for low-value transactions where the risk of fraud isn’t great. The merchants are essentially taking a chance on you and assuming that you won’t try to spend the same Bitcoins somewhere else before the transaction confirms.