Bitcoin, the pioneer of cryptocurrencies, operates on an innovative technology called blockchain. This decentralized, peer-to-peer electronic cash system has revolutionized the financial industry and paved the way for a new understanding of currency and transactions1.
Bitcoins do not exist per se, as there are no physical bitcoins nor do Bitcoin owners have an account. Rather, Bitcoin operates on a blockchain, a digital ledger recording all transactions that have ever occurred between Bitcoin addresses. These records are updated by Bitcoin network participants, known as nodes, and can be viewed using a block explorer1.
Bitcoin Transaction: A Process of Keys and Addresses
The process of sending Bitcoin involves public and private keys. An individual owning bitcoins means that they have access to a key pair: a public key or an address to which bitcoins were previously sent, and a corresponding private key that authorizes the previously sent bitcoin to be sent elsewhere. The Bitcoin address can be compared to a transparent safe, visible to all but accessible only by those possessing the private key.
Breaking Down a Bitcoin Transaction
Bitcoin transactions can be understood by using a practical example. Consider a user, Mark, wanting to send 1 BTC to Jessica. To do this, Mark would use his private key to sign a message with transaction-specific details. This message would contain Inputs, the Amount, and Outputs. Inputs contain information about bitcoins previously sent to Mark’s address. For instance, if Mark received 0.6 BTC from Alice and 0.6 BTC from Bob, to send 1 BTC to Jessica, there would be two inputs: one input of 0.6 BTC from Alice and another of 0.6 BTC from Bob. The amount, in this case, would be 1 BTC. The outputs would be the 1 BTC sent to Jessica’s address and the remaining 0.2 BTC returned as ‘change’ to Mark. This seemingly complex process improves efficiency, with the Bitcoin Wallet managing the behind-the-scenes details1.
Role of Miners
After Mark broadcasts his proposed transaction, miners within the Bitcoin network verify that Mark’s keys can access the inputs, i.e., the address(s) from where he previously received the Bitcoin he claims to control. Miners also form other broadcasted transactions into a block. A miner who has completed the ‘Proof of Work’ is permitted to propose a new block that is added to the chain. This new block is broadcast to the network and if deemed valid by other network participants (nodes), it is passed along. As blocks are added to the chain, the number of confirmations of a transaction, like Mark’s, increases1.
Transaction Fees and Block Size
Each block in the Bitcoin blockchain can contain only a specific number of transactions, determined by the block size, which is 1MB. This limited space leads to the fee market, where miners, incentivized by transaction fees, prioritize transactions offering higher fees. Bitcoin transaction fees can vary widely, based on factors like network congestion and transaction size. Wallets like the Bitcoin.com Wallet allow users to manually set transaction fees, enabling users to optimize for speed or cost