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Everyone on the network is aware of the word “transaction” but, does anyone ever wonder how does it all happen?

A Bitcoin transaction may sound simple but it’s actually very complex. In this article, we’ll be outlining how this process takes place and what are its key steps.

Both your Bitcoin wallet address and Bitcoin network must go through series of steps to ensure that the right amount reaches the recipient.

To begin with, it’s important to understand that a bitcoin isn’t a single record of a coin but it’s actually registered as a transaction, that consists of three parts- a transaction input, transaction output and an amount.

  • Transaction input- This is the bitcoin address from which the money is sent.
  • Transaction output- The bitcoin address to which the money is sent.
  • Amount- The amount of bitcoins sent.

theory behind a Bitcoin transaction

When someone sends bitcoins to you, the address they used to send them to you is registered as the transaction input on the bitcoin blockchain, and your address as the transaction input.

When you send those bitcoins onto someone else, your wallet creates a transaction output which is the address of the person who is receiving the coins. That transaction is then registered on the bitcoin network as the transaction input.

With the help of this system, people can trace transactions back to when bitcoin was first born. This creates a completely transparent system in which all the transactions can be viewed at any time.

How can you send bitcoins?

To send bitcoins, you require two things- a bitcoin address and a private key.

bitcoin wallet address is generated at random and is simply a sequence of letters and numbers.

private key is another sequence of numbers and letters, but this cannot be disclosed to anyone else.

theory behind a Bitcoin transaction

This infographic explains how bitcoins can be sent.

Are there transaction fees?

Certain bitcoin wallet address allow you to set your own transaction fees. Any portion of a transaction that isn’t traced or picked up by the recipient is the transaction fees. This goes to the miners to solve the transaction block as an extra reward.

Why should I wait for my transaction to clear?

Your transactions are verified by miners and there is a set block time of 10 minutes. So, you might be told to wait until they are done mining.

You can view all the transactions in a block chain with a hex editor. A block chain browser is a site where every transaction in the blockchain can be viewed in human readable terms.  If you want to make your activities on the bitcoin network more opaque, you’d have to not use the same bitcoin address repeatedly and avoid sending large amounts of bitcoins to a single bitcoin address.

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11 thoughts on “The theory behind a Bitcoin transaction

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