Blockchain Transactions Explained: Understanding Bitcoin Transactions

The speed and efficiency of bitcoin transactions are just a few of the many intriguing aspects of this revolutionary tech. In this article, we dive deep into the inner mechanics of bitcoin transactions, shedding light on how everything works under the hood.

Bitcoin transactions can seem magical. With the click of a button, value zips across the globe, unbridled by intermediaries or temporal constraints. Yet undergirding this sorcery is an intricate system of digital gears and levers churning tirelessly behind the curtain.

In this article, we peer behind that veil to unpack the hidden mechanics that imbue bitcoin with its almost supernatural qualities. By understanding bitcoin's plumbing — how exactly transactions are executed and recorded — you can better appreciate why it feels like money for the internet age and glimpse its promise to reshape commerce as we know it.

What Are Bitcoin and Blockchain Transactions?

A transaction signifies the movement of cryptocurrency within the blockchain network.

👉 To put it simply, when person A sends a certain amount of bitcoin or other crypto they hold to person B, that's a transaction.

To initiate a transaction, you must first determine the number of bitcoins you wish to transfer, input the recipient's address in the 'to' field, and optionally include a message with the transaction. After specifying the amount and entering the recipient's address, you click 'send.' The transaction is then broadcast across the network, where miners verify it. Upon verification, it is added to the blockchain, allowing the recipient to obtain their bitcoins. Typically, that can take up to 10 minutes.

How Crypto Transactions Work

For the legions of bitcoin faithful, sending satoshis flitting across the globe is as simple as tapping a few keys, or, in other words, inputting a sum and an address into their wallet and hitting send.

Although delving into the technical wizardry operating behind the scenes isn't necessary, gaining an understanding of how it functions can provide both practical and profound insights.

Under the hood, bitcoin employs public-key cryptography to maintain the integrity of transactions generated on the network. To transfer bitcoin, each participant has a pair of public and private keys that govern the bitcoin they own.

👉 A public key is an alphanumeric string that a user must share to receive funds. Conversely, a private key should be kept confidential as it authorizes the spending of any funds received by the corresponding public key.

By using the private key linked to your bitcoin, you can sign transactions and transfer the value to a new owner. The transaction is subsequently broadcast to the network for inclusion in the blockchain.

Bitcoin Transaction Example

To illustrate how bitcoin is transferred between users, let's look at an example where Jimmy sends 0.1 bitcoin to his dad.

Jimmy’s transaction has three key components:

• Inputs or the 'From' address: The bitcoin address Jimmy uses to receive and store the bitcoin he now wants to spend. His bitcoin wallet uses a private key to access this address.
• Outputs or the 'To' address: Jimmy’s dad’s public wallet address, where he receives bitcoin payments.
• The amount: The precise amount of bitcoin, 0.1 that Jimmy wants to transfer to his dad.

👉 Fun Fact: Bitcoin transactions can have multiple 'From' addresses and 'To' addresses, as long as the total 'From' amounts are greater than the total 'To' amounts.

To send his transaction, Jimmy digitally signs the message using his private key. His signature proves he owns the 'From' address and the bitcoin it contains. Jimmy then broadcasts the signed transaction onto the Bitcoin network, where nodes validate his signature and the transaction details.

Once verified, the transaction floats through the network until it lands in the inbox of a miner. The miner bundles Jimmy's transaction into its current block template — a rough draft of the next block of transactions it is trying to add to the global blockchain. If the miner won the race to mine the next block, its block template would transform into a permanent block on the blockchain, with Jimmy’s transaction safely inside. The miner then blasts this new block out to the rest of the network, and Jimmy’s bitcoin payment is officially complete — 0.1 of his bitcoin has successfully teleported from his wallet straight into his dad’s!

👉 To learn more about a blockchain, consider our primer on its inner mechanics.

Tracking Cryptocurrency Transactions: Are Cryptocurrency Transactions Anonymous?

Many assume bitcoin is anonymous, but that is false. While your real name is not tied to your bitcoin address, all transactions are public on the blockchain. Your address is linked to your full transaction history, allowing others to trace your bitcoin activity.

Blockchain explorers are software tools that let you view blockchain data and trace bitcoin transactions. Blockchain.com is a popular explorer with an easy-to-use interface.

To trace a bitcoin address on Blockchain.com:

1. Enter the address into the search bar.
2. Hit enter and you'll see details of all transactions for that address, including amounts sent/received and transaction dates.
3. You can analyze the address's transaction patterns and connect it to other addresses it has transacted with.

👉 Bitcoin 'taint analysis' involves tracing transactions to uncover their origin and flow. This helps law enforcement investigate criminal bitcoin use and financial institutions prevent fraud. However, sophisticated users can hide transactions by using multiple addresses or 'mixing' their coins with others. So, taint analysis has its limits.

How Are Transactions Verified on the Blockchain?

Cryptocurrency blockchain networks employ algorithms to safeguard, validate, and autonomously regulate activities on the blockchain. In the case of Bitcoin, developers introduced an innovative verification mechanism known as proof of work. Proof-of-work (PoW) is a decentralized system that confirms the accuracy of transactions on the blockchain network.

In essence, proof-of-work eliminates the need for a central authority, such as a bank, business, or government agency, to oversee and manage transactions and their related accounts. Instead, an algorithm checks countless transactions daily to ensure the entire transaction history remains untampered and unchanged.

👉 Cryptocurrency transactions occur on a decentralized public ledger called a blockchain — a massive digital record of all transactions. Each "block" contains a finite number of crypto transactions. Connecting these blocks forms a chain, hence the term "blockchain." Every computer (or "node") participating in a crypto's blockchain network maintains its own copy of this blockchain.

So, how does a new transaction get added to a block? This is where proof of work comes into play.

Your transaction is grouped with other unverified transactions (people buying, selling, or exchanging bitcoin). These transactions await placement in a block. Crypto miners worldwide (essentially, computers operating within the network) strive to solve a complex mathematical puzzle. Their objective is to produce a 64-bit "hash" (akin to a signature or a password) that aligns with bitcoin's "target hash." In reality, it's an enormous guessing game. Mining computers make trillions of guesses per second, which explains why the process is energy-inefficient and costly. It takes, on average, about ten minutes for miners to mine a new block. The first miner to achieve the goal gets to write the next page of blockchain transactions.

The grouped transactions are placed in a block. That block, along with its solution, is sent to the entire Bitcoin network so that each computer can validate it and update their copies of the ledger.

Every action in the Bitcoin network must occur in "consensus," meaning all computers must agree to the same data. This is why proof of work is referred to as a "consensus mechanism." It's also why the Bitcoin network is called a "trustless system." The entire system is mechanized by computer consensus rather than relying on the trust of a single entity (unlike a banker who might accidentally "lose" your paycheck deposit or misallocate your funds).

Nonetheless, alternatives to proof of work exist, which are deemed more efficient and less energy-consuming. Examples include proof-of-burn, proof-of-stake, proof-of-capacity, proof-of-history, proof-of-weight, proof-of-authority, and proof-of-elapsed-time, with proof-of-stake being the most widely used.

In a proof-of-stake (PoS) system, there are no miners vying for the opportunity to add a new block to the chain. Instead, participants in the network contribute to the block-adding process by "staking" a certain number of coins. The staker responsible for creating the new block — known as minting or forging, as opposed to mining — is selected at random. However, the bigger your stake, the higher your chances of becoming the chosen staker.

Are Crypto Transactions Reversible?

Transactions on the blockchain cannot be reversed. Cryptocurrencies rely on decentralized blockchain technology, which guarantees transparency, security, and unchangeability. When a transaction is incorporated into the blockchain, network participants verify and safeguard the transaction information. After being confirmed, the transaction is permanently documented on the blockchain, making it impossible to modify or undo.

Bitcoin Transaction Confirmation

When conducting a traditional money transfer through banks using fiat currencies, you receive a transaction receipt. This receipt acts as evidence that the transfer was legitimately executed and completed, providing reassurance to both parties and eliminating doubts about the transaction's success or potential errors. But how does this work in blockchain?

Transactions on blockchains are not processed immediately upon request. Instead, you must wait for the block to be completed, sealed, and appended to the chain. Until then, your transaction is not considered permanent and could be reversed. However, the completion of just one block is not enough to guarantee a transaction's permanence.

Occasionally, as miners compete to solve the cryptographic code, two or more miners may arrive at the solution simultaneously. In this case, all of them are temporarily designated as validators, and each mines its own block. These blocks are then added as extensions to the most recent block.

The network waits for the next few blocks to be added. Once a specific number of blocks have been appended, the lengths of the extended branch chains are compared. The longest chain is retained, while the other branch chains are discarded. Transactions recorded in the discarded blocks are reversed, and users' funds are returned as if the transfer never occurred.

Users must wait for additional mined blocks to be added after the block containing their transaction records. Each appended block counts as one blockchain confirmation. The more confirmations a transaction has, the less likely it is to be reversed, and the more secure it becomes.

Transactions with larger confirmation numbers are also better protected against hacking attacks. This is because all blocks are connected chronologically, with each block following its predecessor.

If an attacker attempts to breach a block to alter its recorded data, they must hack not only that block but also all subsequent blocks. Therefore, a transaction with, for example, 30 confirmations is more resistant to hacks than those with only 1 or 2 confirmations.

The time required to add one confirmation to a transaction varies between blockchains and depends on the network's block mining time.

For instance, in Bitcoin's case, a new block is added every 10 minutes. To obtain ten confirmations on a transfer, you might have to wait nearly an hour and a half. However, Ethereum and Solana, both proof-of-stake blockchains, require much less time to mine a block. As a result, you only need to wait a few minutes to receive hundreds of confirmations.

Why Do Bitcoin Transactions Get Stuck?

Bitcoin blocks are mined every 10 minutes on average. However, the number of transactions broadcast to the network can sometimes exceed the block size, causing some transactions to get stuck in the mempool. This is normal and happens for two main reasons:

1. There is a spike in transaction volume. When the number of transactions surges, some will have to wait to be processed as the blocks can only fit so many transactions.
2. The hashrate drops suddenly. The hashrate refers to the total computing power of miners. When it drops, fewer blocks are mined and fewer transactions are processed. The difficulty adjustment occurs every 2 weeks to account for changes in hashrate.

To prioritize which transactions get into the next block, Bitcoin nodes generally prefer transactions with higher fees. Transactions with lower fees remain unconfirmed in the mempool until there is space for them in a new block.

Can Bitcoin Transactions Remain Unconfirmed Forever?

Transactions in the mempool will remain pending until they are confirmed, potentially lasting in this virtual waiting area for weeks. However, their status won't be "unconfirmed" indefinitely.

Over time, pending transactions will eventually vanish from the mempool, as if nothing occurred. When there are too many bitcoin senders offering fees above a particular threshold, nodes tend to prioritize higher-value transactions. As a result, lower-value transactions are removed to create space for more valuable ones.

It's important to note that all miners must first erase their memory of your unconfirmed transaction before the network considers it forgotten. If not, the transaction would still be pending in the mempools of nodes that haven't removed it.

Can I Cancel Unconfirmed Blockchain Transaction?

There's usually no need to worry about unconfirmed transactions, as they typically resolve within 48 hours. However, if you're uncertain about waiting for the confirmation notice, you have a couple of options.

• Utilize the Replace-by-Fee (RBF) Protocol

The RBF protocol offers a way to cancel your unconfirmed transaction by allowing you to resend a bitcoin transaction with a higher fee attached. The transaction information is broadcast across the entire Bitcoin network.

Mining nodes prioritize the higher fee and process the transaction accordingly. Your previous transaction will be canceled, and the funds associated with it will be returned to your wallet.

To use the RBF protocol, your wallet must be compatible with it, and the option is typically enabled by selecting a checkbox before confirming the transaction.

• Employ a Standard Double-Spend Method

If the RBF protocol isn't supported, you can initiate a second transaction from your wallet with a similar amount and a higher fee. Miners generally prioritize and complete the new transaction.

Most Bitcoin software includes safeguards against double-spending to prevent losing bitcoins. As a result, you may need to use a secondary wallet or another client to perform this action.

To err on the side of caution, it’s best to use the RBF protocol when considering canceling a bitcoin transaction.

Crypto Transaction Speed

The time taken to confirm transactions varies significantly between different cryptocurrencies. According to estimates by Kraken and Statista, depositing some cryptocurrencies could be nearly instant, while others may take hours to confirm (see Fig. 1).

The transaction speed is important because it indicates crypto’s efficiency. A faster transaction speed means the underlying blockchain is better able to transfer data and confirm transactions between parties. Several factors influence crypto transaction speed:

• Block time: The average time interval between mined blocks. A shorter block time allows for faster confirmation of transactions.
• Block size: The maximum number of transactions that can fit into a block. A larger block size results in fewer transactions waiting to be confirmed in the next block.
• Transaction fees: Miners prioritize transactions with higher fees, so coins with lower fees generally have slower confirmation times.
• Network traffic: When there are spikes in transaction volume, the network gets congested and confirmation slows down. Less network congestion allows for faster processing of transactions.

In summary, a cryptocurrency's efficiency and transaction speed depend on its blockchain's technical capabilities as well as real-world factors like network usage and fees. A fast, efficient network is able to quickly confirm transactions even when there are large volumes of network activity.

Fig. 1. Average transaction speed of 50 cryptocurrencies with the highest market cap as of September 2022, according to Statista.

What Are Crypto Transaction Fees?

Transaction fees are charged when a specific amount of cryptocurrency is transferred between wallets. These fees are flexible and can fluctuate depending on the blockchain's congestion.

Users who want to speed up their transactions can choose to pay a higher transaction fee, which miners will typically prioritize.

All bitcoin transactions enter a queue called the memory pool. If the mempool becomes congested, miners choose which transactions to verify first. Transactions with higher fees are prioritized, leading some cryptocurrency users to increase fees for timely or urgent transactions.

Ethereum fees are measured in gas, representing a small fraction of ETH. Transaction fees play a more significant role in Ethereum than in Bitcoin due to the former's advanced features, such as smart contracts and decentralized applications.

Who Gets Bitcoin Transaction Fees?

Transaction fees incurred when sending bitcoin to another wallet are directed to miners. Miners contribute their resources to support the network and validate transactions, which are stored in blocks and subsequently added to the blockchain. This process is crucial for preserving the integrity of the entire Bitcoin network, and as such, miners are duly compensated for their efforts.

How Are the Fees Calculated?

Bitcoin transaction fees are determined by market forces of supply and demand. There is a limited number of transactions that can fit into each block, and miners will prioritize transactions that offer the highest fees. This results in a bidding war between users.

When there is a spike in transaction volume, the "priority fee" required to get transactions confirmed in a timely manner will increase. At times of high network congestion, fees can skyrocket as users bid up transaction fees to cut through the backlog.

You have two options when fees surge:

• Wait to send the transaction until fees decrease again. Once transaction volume drops and congestion eases, the priority fee should come back down.
• Send the transaction during off-peak hours when network activity is lower. The reduced congestion means lower priority fees to get transactions included in the next block.

In summary, bitcoin transaction fees fluctuate based on market dynamics. When demand exceeds capacity, fees rise as users compete to get their transactions processed quickly. You can save on fees by being patient and waiting for less busy periods with lower congestion before sending your bitcoins.

Can Transactions Be Made without a Fee?

Typically, you’d always be expected to pay some sort of fee. However, transactions fees vary just as greatly as transaction speed. Bitcoin fees are generally low due to its relatively straightforward mining process. For even lower fees, alternative coins like Bitcoin Cash and Litecoin can be used. These coins were created to provide more practical utility as currencies. While the average bitcoin transaction cost is around $7.25, Bitcoin Cash transactions can be $0.01 or less and confirm faster than bitcoin transactions. Similarly, Litecoin transactions usually cost a few cents.

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FAQs

What Is the Bitcoin Transaction Process?

The bitcoin transaction process is a series of steps that facilitate the transfer of bitcoin from one wallet to another within the Bitcoin network. This well-choreographed process ensures transactions are secure, transparent, and irreversible. Below are the stages of the bitcoin transaction journey:

1. Creating a transaction: When you want to send bitcoin, you create a transaction by specifying the recipient's address, the amount of bitcoin to be sent, and a transaction fee. Your wallet will then sign the transaction using your private key, adding a digital signature to prove you're the genuine sender.
2. Broadcasting the transaction: Once the transaction is created and signed, it is broadcasted to the Bitcoin network. Nodes on the network receive the transaction and check it for validity, ensuring that the digital signature is correct, you have sufficient balance, and the transaction adheres to the network's rules.
3. Mempool: Once validated, your transaction takes a short break in the mempool, a temporary pool of unconfirmed transactions just waiting for their moment to shine.
4. Mining and confirmation: Miners are responsible for selecting transactions from the mempool, verifying them, and including them in a new block. They employ computational resources to solve complex mathematical problems in a process called proof-of-work. The first miner to crack the code gets to add the new block to the blockchain, and your transaction is officially confirmed!
5. Block propagation and consensus: As the new block joins the blockchain, it's shared across the network. Each node independently verifies the block and updates its copy of the blockchain. This harmonious process ensures that the entire network agrees on a single version of the blockchain, upholding its security and integrity.
6. Transaction finalization: With your transaction now part of a block in the blockchain, the recipient's wallet balance updates to include your generous gift of bitcoin. The transaction is final and irreversible—no take-backs! Altering it would be like trying to change history, which is computationally near-impossible.

The bitcoin transaction process is designed to provide a secure, decentralized, and trustless system for transferring value without the need for a central authority like a bank or financial institution.

Can You Trace Bitcoin Transactions?

Yes, bitcoin transactions can be traced because the Bitcoin network is built on a transparent and public ledger called the blockchain. Every transaction that occurs within the network is recorded on the blockchain, which can be accessed and viewed by anyone.

Each transaction contains information such as the sender's address, the recipient's address, and the amount of bitcoin transferred. While these addresses are alphanumeric strings and do not directly reveal the identity of the users, they can sometimes be linked to individuals through various methods, such as chain analysis.

What Are Unconfirmed Bitcoin Transactions?

Unconfirmed bitcoin transactions are transactions that have been broadcasted to the Bitcoin network but have not yet been verified and included in a block by miners. When a user sends bitcoin, their transaction is initially added to a temporary pool of unconfirmed transactions called the mempool.

Miners select transactions from the mempool, verify them, and include them in a new block as part of the mining process. Once a transaction is included in a block and that block is added to the blockchain, the transaction is considered confirmed.

Are Bitcoin Transactions Instant?

Bitcoin transactions are not instantaneous. The verification time can vary, ranging from a few minutes to several hours, especially if a transaction is submitted with a low mining fee.

To expedite your cryptocurrency transaction, select the high-priority option, which will help it move through the network more swiftly. Miners are more inclined to prioritize transactions with higher fees. If you opt for an extremely low fee, your transaction may remain unconfirmed for days.

How Long Do Bitcoin Transactions Take?

The time it takes for a bitcoin transaction to be confirmed can vary, primarily depending on the transaction fee and the network's current congestion. Consider 10 to 40 minutes an average.