How do Bitcoin Transactions Work: An In-depth Guide

A week or so ago I had written a post titled “What is Bitcoin(BTC): A beginner’s guide.” I think that it helped you guys to understand something if not a lot about bitcoin. Alright, moving forward as many if not all of you may be aware that bitcoin is a peer to peer based independent blockchain platform that allows you to send and receive money globally without any middleman business. But then many people may not be aware as to how the transactions on bitcoins network happen. Therefore, with this post, I intend to educate a lot of people as to how the transactions on bitcoins system happen.

So what I’m going to do is segregate this post into simple, intermediate and difficult levels of difficulty.

On that note, let’s begin the simple section of this post:

Simple Part

Let’s assume there are 2 people Y and Z. Now if Y wants to send some amount of bitcoin to Z then he/she would need to a) have the required amount of BTC in his/her wallet (obviously), b) incur a transaction fee which is mostly in the range of 15-20$ but may be more or less depending on several other factors and finally c). Either Y or Z must not have sent that particular bitcoin (because every bitcoin is unique regarding its hash) to any other person.

After this transaction is initiated by either Y or Z, then it gets published on the blockchain. Then several people known as miners solve a bunch of mathematical calculations and try to verify the transaction information between the parties involved. If they don’t find anything fishy concerning the transaction being made, then they give it the all clear. After this happens, the verified transaction gets included within a block and is linked to the previous block and becomes a part of the blockchain ( hence the name ).

Apart from this, the fascinating feature would be that no one can tamper, i.e., meddle or fiddle with the transactions that happen on the blockchain because that would mean that all the previous blocks within the platform would have to be re-written.

So, in a nutshell, that was the simple version of how transactions happen on bitcoins network.

Medium version

A bitcoin wallet doesn’t store your bitcoin. Wait, what? Then where are they? Is Bitcoin robbing me of my bitcoin? Lol. Actually. Nope. What the reality is that my bitcoin wallet bears the honor of storing my bitcoin address. This address ( a long string of 34 letters and numbers ) a.k.a. My public key is supposed to maintain a record of all my transactions and balance. I can flaunt this to the entire world provided I keep my private key safe and sound in my Ledger Nano S or Trezor Wallet or anything else. Every public key on the bitcoins blockchain has a private key of 64 letters and numbers attached to it. However, even though the two keys are correlated to each other, there is no way for you to find out my private key through my public key.

Again I’m not hesitant to say that keeping your key safe and sound is very very important, because of this particular reason: Any transaction that you intend to issue from your bitcoin address requires you to sign the transaction by using your private key. Now to do this, I would have to insert my private key and the transaction details (i.e., how many bitcoins I wish to send and to whom) into whatever software I use ( whatever it is that you prefer ). Then with the help of this information, the program blurts out a digital signature which gets transmitted on to the network for validation.

This transaction can get verified, i.e., confirmed that I, in fact, do possess the amount of bitcoin that I want to give you, and I did not send it to anyone else earlier just by inserting the signature and my public key (which is already famous worldwide by now) into the bitcoin program.

Now here is where the genius of Satoshi Nakamoto shines as in if the signature has been made using my private key that corresponds to my public key, then the bitcoin algorithm or program or software will sanction the transaction, without anyone being in the know-how regarding my private key info. Now is this clever or what.

Anyways, moving on. The network will then try to confirm that I haven’t earlier spent the bitcoin that I’m looking to transfer by sifting through my address history which it can do pretty quickly, i.e., in a snap of a finger since it knows my address, i.e., my public key and because of the fact that all transactions are open on the bitcoin ledger.

Now time for the most complicated version of this post.

The Difficult Version

Once my transaction gets approved by the miners, it gets bundled up into a block with several other transactions.

Now before we proceed to the next paragraph let us enjoy a brief walkthrough about what a “hash” is because it’s of paramount importance for us to understand; otherwise the next paragraph will go like a bouncer over your head. So a hash is created by a hash function that is a complex math equation that reduces a certain amount of text or data into a 64-character string. This hash is not random because every time you plug in that particular data set through the hash function, you’ll see the same 64-character string. Pretty cool. Eh? However, even the slightest amount of change like a comma will fetch you an entirely different 64-character string. This hash could be forged again and again, unless and until I decide to change, add or subtract anything from the text. This is a handy way to tell if something has been tampered with and is primarily how the blockchain tends to confirm that no meddling has happened with any transaction on the blockchain.

And now back to our blocks. Each block consists of a hash of the previous block as a part of its data. This interlinking of blocks is what makes every block a part of the ongoing chain which is why we call it a “blockchain.” So, even if a tiny segment of the previous block were to get tampered with then; as a result, the current block’s hash would have to be altered (remember that even the smallest of changes in the input of the hash function results in a completely different output). Therefore, if you want to alter something inside the previous block then you would also have to change something, i.e., the hash) within the existing block because that is the one that is currently being made a part of the system and is no longer valid. Now, this is very hard to do, specifically for the reason that by the time you’ve reached halfway through your funny business, you’d probably have to deal with another block on top of the current one you are trying tamper with. You’d then also have to meddle with this one and then the next and the next and so on and so forth.

Therefore, it is for this very reason that it is next to impossible to do some hanky panky with the transactions on Bitcoin. I say this because it’s not impossible, just highly unlikely that such an event was to occur.

Now that is it for this post. If you have any further doubts, then please do ask your questions in the comments section below.Also, please remember to follow us on Facebook, Twitter, Instagram.