How Bitcoin Transactions Work — [ALL YOU NEED TO KNOW]

Table of Content

• Basic terms to understand Bitcoin transaction
• What is a node in Bitcoin
• How Bitcoin transactions work in depth
• What is a Block in Bitcoin
• How Bitcoin Transactions work : Summery
• Bitcoin Mining Basics

Now I’m going to talk about how bitcoin transactions work in depth and I hope you will get a very good understanding about bitcoin transactions. If you want to learn the basics about Bitcoin you can go through what is bitcoin and How does it work article. Before go to the bitcoin transaction let’s see how normal money transaction works.

Example : In here Jacob who lives in USA wants to send 100$ to Emma who lives in UK. First Jacob has to go to the bank and put 110$. After bank identifies, checks and confirms the transaction Emma gets 100$. In here bank charges 10$ fees and the transaction takes 1–3 days.

Basic terms to understand Bitcoin transaction

Before learn about bitcoin transactions it will be easy to understand it if you know these terms.

• Open ledger : A public and open book of financial accounts. Example- If you go to bank and ask for your bank account statement the bank will give it. If I ask for another person’s bank account statement the bank won’t give you that and this banking system is not an open ledger. when we consider bitcoin transaction anyone can check any transaction so it is an open ledger.
• Open “distributed” Ledger : previously I told you about the open ledger and it has only one ledger. Instead of one public ledger , when we distribute it among everyone it is called blockchain in bitcoin. one transaction is called a “block” and they are connected to each other. All together, it’s called blockchain so bitcoin has open distributed blockchain.

What is a node in Bitcoin?

A node is an account or an user with a wallet in a bitcoin network and bitcoin network is peer to peer network. What is peer to peer network? what is bitcoin wallet? click here to read my previous article about basics of bitcoin.

The special nodes are called miners who keep the ledger updated by solving math problems and maintain the system security. Please check my previous example in this post A and D are miners.

How Bitcoin transactions work in depth

Example : A wants to send bitcoins to B and A has to enter B’s bitcoin public address and send it. But there is a process in between A presses send button and B receives it. If you know about this process in detail you will be able to understand the process of other cryptocurrencies because most of the other cryptocurrencies use this same method with minor modifications.

1. A wants to send 5 BTC to B and A creates a transaction message.
2. In cryptocurrency field this kind of transaction message is called “Block”.
3. After creating the Block, A has to broadcast it to Bitcoin network. Anyone can see that transaction block after broadcasting it to Bitcoin network but it isn’t confirmed.
4. Now Miners start to confirm the transaction.
5. If everything is ok the transaction block will be added to the blockchain after the last block.
6. B receives 5 BTC.

What is a Block in Bitcoin?

Now you’re going to learn about what is a block in Bitcoin, the unique ID of a block and the purpose of a block.

Example: A want to send 5 BTC to B.

• Transaction message : A logs into his wallet, puts B’s public wallet address and create a transaction message saying that he wants to send 5BTC to B and he sends it.
• Encrypt the message : after press sending, first the transaction message which was created by A should be encrypted.
• What is the purpose of encrypting? It prevents other people reading and changing your transaction message.
• How to encrypt? There are two types of keys for A’s wallet. They are Private key and public key and only A knows the private key for A’s wallet. so using private key, the transaction message can be encrypted.
• Create the Digital signature : After encrypting transaction message we have to give a unique ID for that transaction message because bitcoin network has to identify it. So Bitcoin network gives unique digital signature for each transaction and digital signature helps Bitcoin network to validate a transaction. Signature can be used to verify sender own the private key without revealing it.(using complex math algorithms) This is also known as “ witness” .
• Miners : The validation process using digital signatures is done by miners. Miners do the math analysis using powerful computers and validate the signature and the transaction.

Continue Reading : How Bitcoin transactions work

Originally published at https://www.emoneyfellows.com on May 25, 2020.