How do Bitcoin transactions work?

A bitcoin transaction is a process that involves sending the cryptos from one bitcoin wallet to another. The process requires a digital signature. Once it has been completed, a public record of the transaction is broadcasted to the peer to peer network for every member to see. After a transaction has occurred, the buyer’s bitcoin wallet balance increases while the seller’s bitcoin balance decreases.

Here is a demonstration of how a bitcoin transaction between two people works. Consider two people Grace and Betty transacting via a network. If grace is the seller and Betty is the buyer, there are three main kinds of information that are crucial for the transaction. These are an input address, an output address and amount.

For Grace to be able to send bitcoin to Betty, she must have enough bitcoins in her account to match Betty’s order. Therefore, the system identifies previous transactions in Grace’s account that have enough bitcoins to match Betty’s order. That address is referred to as the input address which is used to make the transaction. The amount is the number of bitcoins that will be transacted between Grace and Betty. The address to which the bitcoins are being sent is designated as the output address.

As a way of preventing double-spending, the input address for a transaction must refer to one or multiple input address in the blockchain that have not been spent. Use of multiple input addresses is similar to how one uses multiple coins when paying cash to reach the amount of the transaction. For instance, if one is purchasing a product for 5 dollars, they can use five one-dollar coins to make the purchase if they do not have a 5-dollar coin.

As mentioned earlier, for the transaction to happen, it needs to be digitally signed. Digital signature in bitcoin transaction is formed by the bitcoin address and a private key generated in the blockchain.  The bitcoin address is a randomly generated number and alphabets that represent a buyer’s and seller’s account. The bitcoin address is available for viewing to all public in the network. On the other hand, each trader’s private key is secret usually their bitcoin wallet account password.

Therefore, for Grace to send bitcoins to Betty, she uses her private key as a digital signature authorizing the transfer of a specific amount of bitcoins to Betty’s wallet. Her bitcoin address serves as her output address and as Betty’s input address.

Once the transaction has been completed, miners pick up the transaction from the network, verify it and find a proof of work for it. When the verification process is complete, the transaction forms a block that is attached to other blocks in the chain. It is then broadcasted to the entire network for all members to see. Due to the time required to verify and broadcast a transaction, the transaction may take a while (10-30minutes) to reflect on both traders account and on the network.

Transaction costs

While some bitcoin exchanges and trading places charge a transaction fee, others do not. Those that charge, the fee will depend on the amount of bitcoin being transacted. The higher the amount being transacted, the higher the transaction fee. In addition, if the bitcoins are being transacted for fiat currency, the traders may incur extra cost in converting their currency to fiat currency in the case of the buyer and fiat currency to their country’s accepted currency in the case of the seller.

How much bitcoins can one transact?

The amount of bitcoins that one can transact in varies. While some exchanges deal specifically in high volume transactions, others specialize in low volume transactions. A bitcoin can be divided by up to 0.00001, and therefore traders can transact in a millionth of a bitcoin.

From face value, a bitcoin transaction is a simple process. However, in actual sense, it is a complex process that follows bitcoin transacting protocol. The key elements of a bitcoin transaction are the input address, output address and the amount being transacted. While some bitcoin trading places charge transaction costs, in others the transaction is done for free.  The bitcoin network and wallet are created to provide optimal security for traders to trade safely.

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