Explaining Bitcoin transactions

Bitcoin transactions are usually sent between digital Bitcoin wallets. What we should note, however, is that Bitcoins are not present in any form anywhere (even on a hard disk). There simply are no physical objects or digital files, which you can point to, but only records of transactions made between particular Bitcoin addresses. And, as we noted earlier in the guide, every transaction that ever occurred is stored in a public ledger known under the term of ”blockchain”. This way every member of the Bitcoin network is aware of a particular transaction and can trace its history back to the point where Bitcoins were generated (mined).

What does a transaction include?

Every transaction is associated with three key elements:

1. Input. If we have a transaction from Bitcoin address A to Bitcoin address B, the input will actually be a record of a third Bitcoin address, C, from which the Bitcoins were transferred to address A originally;

2. Amount of Bitcoins that are being sent from address A to address B;

3. Output. It, in fact, refers to Bitcoin address B.

If you are willing to transact Bitcoins, you need to have a Bitcoin address and a private key. The Bitcoin address is usually presented as a string of letters and numbers and is generated at random. It is visible to other members of the Bitcoin network. The private key also represents a string of letters and numbers, but it remains visible only to its owner. Thus, if you want to send a certain amount of Bitcoins to another person, you need to use your private key in order to sign a message that includes the input, the amount and the output. The message will be sent from your Bitcoin wallet to the Bitcoin network. After that the transaction needs to be verified by Bitcoin miners, or it will be placed into a transaction block that will eventually be ”solved”. We shall look into the concept of Bitcoin mining later in the guide.

As the transaction has to be verified by miners, at times, you may have to wait until the transaction block is solved. The protocol of Bitcoin is designed in such a way, so that each block requires about 10 minutes to be solved (mined).

Not all merchants will make you wait until the transaction is verified. For example, this may be the case with low-value transactions. The merchant will assume that you will not use fraud (you will not spend the same amount of Bitcoins at another merchant before the transaction is confirmed).

A specific case

At times, it is possible that the input and output amounts do not match. Your Bitcoin address may be associated with a number of different transactions. For example, you may have received 3 Bitcoins from user A, 5 Bitcoins from user B and 7 Bitcoins from user C, which will be recorded as separate transactions at separate moments in time. These three transactions will not be automatically summed up in your Bitcoin wallet to form a file with 15 Bitcoins. Instead, they will be present as different transaction records.

When you transact Bitcoins to another person, your wallet will generally use transaction records for different amounts, which add up to the amount of coins you plan to transfer to that person.

What if you intend to transact 2 Bitcoins to user D? None of the transaction records in your Bitcoin address reflect such an amount and none of those records add up to such an amount if combined. What you need to do in such a case is send one of your available transactions and have the remaining Bitcoins returned to you as change. So, you may send the 3 Bitcoins, which you received from user A. This way user A is the input and user D is the output. However, the amount is 2 Bitcoins, as this is what you wish to transact. As a result, your wallet will automatically create two outputs for the transfer you intend to make:

1. 2 Bitcoins, which you are sending user D;
2. 1 Bitcoin, which is being sent to a new address, established for you. It is where you will actually receive the change from user D.

As far as the matter with fees is concerned, currently, the majority of miners verify transactions with no fees charged. However, as miners will be awarded with fewer Bitcoins for every block solved in the future, it is reasonable to expect transaction fees.

Last but not least, we should note that it is possible for you to transact amounts lesser than a single Bitcoin on the Bitcoin network. The smallest possible unit, which is equal to one hundred millionth of a single Bitcoin, is known as a ”Satoshi”. Currently, the minimum amount, which you are able to transfer, is 5460 Satoshi, or 0.00005460 Bitcoins.

Note that, as of October 2017, 1 US cent was worth roughly 171 Satoshi.