In this post, I’m going to share with you how bitcoin transactions work. In-depth. I recently posted “how to send and receive cryptocurrency“. The process of transaction is complicated and it’s all about math.
So I will try my best to explain it simply.
Before we begin, I think we better discuss how normal money transaction works.
Assume, “Brian” in the USA and “Peter” in the UK. Brian wants to send 100$ to Peter. How should he do that? He can simply go to the local bank and make the transaction.
But, Brian had to spend 110$.
The extra 10$ is for the transaction fee. Banks won’t do it free for you, right? Well as soon as Brian submit his transaction, Bank identifies, check and confirm the transaction. That is the validation process.
Then the bank makes the transaction of 100$ to Peter.
However, we recognize the bank as a third party. Brian trusted the bank that they will send his money to Peter.
Well, this type of money transaction, Can be categorized as a Centralized system that has a central authority to manage the transactions.
Let’s get into how bitcoin transactions work
Unlike the normal money transaction system, the Bitcoin transactions don’t have a central authority which means it is decentralized. And it is a peer to peer transaction system.
Then who takes responsibility? Who identifies the transactions?
The miners do. If you don’t know about miners, please refer to this article. The main role of these miners is, Validate the transactions and add them to the blockchain. And maintain the security of the network.
This process can’t describe in simple words. It is a whole different level and complex math based.
The best part?
The Bitcoin Transaction Process
This is a step process so I decided to group them. So you can easily understand.
- Transaction Message
- Digital Signature
- Miners Role
- Miners Synchronization
I will use the same example as used above to explain this as well. Assume, Brian wants to send 3BTC to Peter.
1) Transaction Message
This is where Brian’s transaction details included which are the Public address of Peter and the amount of transaction.
Well, when Brian submits the transaction details and sends, The transaction will start to process.
Here’s the important part.
There’s a unique key called “Private key” used in this process to encrypt the transaction message created by Brian to avoid anybody can read it. As soon as the transaction data encrypted with the private key, it is now called a “Block”
3) Digital Signature
After the encryption process, The block is written with a unique ID called a digital signature. This is also known as the Witness of the sender (Brian).
With the help of the digital signature, the Bitcoin network can easily identify the transaction. Every transaction must be identified with a digital signature,
Otherwise, All the transactions could be mixed with each other.
Also, it validates the transaction details which, Brian wants to send 3BTC to Peter.
This is similar to the signature of a cheque in the real world.
In this step, The block, broadcast to the bitcoin network so miners can pick the transaction. This is the unconfirmed transaction.
5) Miners Role
There are thousands of miners maintaining the bitcoin network. They solve the complex mathematical algorithms in the transactions and adding them to the blockchain
After broadcasting the block which contains Brian’s transaction message, A miner will pick the transaction and check the details by taking the digital signature.
They can identify the actual process by using the digital signature. After validating all the components, They will also validate the transaction and add the block after the final block of the blockchain.
Now it is a confirmed transaction and Peter receives 3BTC.
All the above processors are based on complex mathematical algorithms we can’t even understand. This is why I am using simple terms to easily understand everyone
6) Miners Synchronization
After a miner confirmed and added the transaction to the blockchain, The miner who confirmed the transaction, broadcast a message to other miners the transaction of “Brian to Peter” is confirmed.
This is also a mathematical algorithm.
This process is to stop other miners from making the transaction had been already confirmed.
Alright, this is the simplest way I can explain. I hope you understood well.
Track your bitcoin transactions, here: https://blockexplorer.com/
What do you think?
Did you learn something new?
What are your opinions?
My post needs to change something?
Let me know down in the comments.