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How Bitcoin Transactions Work

Learning bitcoins
This is a continuation of our lesson on bitcoin. In this entry we will consider How Bitcoin Transactions Work.
In the previous lesson, we learned about bitcoin wallets and how they work. We explained that bitcoin wallets don’t actually store physical bitcoins (as there is nothing like physical bitcoins actually, as bitcoin as you might already know is a digital currency)– they store private and public keys required to access your bitcoins.
In this lesson, you’ll learn things like:

  • A bitcoin transaction is a transfer of value using the bitcoin network
  • Bitcoin transaction information isn’t encrypted
  • Anyone can view a bitcoin transaction using a blockchain explorer
  • Transactions must be verified by miners on the blockchain network
  • Miners receive bitcoin rewards in exchange for verifying transactions


Bitcoin Transactions on the Bitcoin Blockchain

The bitcoin blockchain is a public ledger on which every bitcoin transaction is recorded. Every bitcoin transaction in the history of bitcoin can be found on that ledger – from the very first bitcoin transaction to mysterious transfers of $100 million. It’s all viewable for anyone to see.
The blockchain is maintained by a network of nodes. Nodes are computers connected together across the bitcoin network. Each computer runs the bitcoin software. These nodes create the decentralized network behind bitcoin. No single node is worth more than any other node. It’s a decentralized, democratic system outside the control of any centralized authority.
Let’s say you want to send bitcoin to someone. You open your bitcoin wallet, enter your recipient’s wallet address, and authorize the transfer.
At this point, your transaction is sent to the bitcoin network where it will be validated by the network of nodes. Valid transactions are added to their individual copy of the ledger, and each computer broadcasts their version of the ledger to other nodes on the network. These nodes create a “consensus” – they reach an agreement on the “true” version of the bitcoin blockchain. Then, a block of transactions is added to the chain – hence the name blockchain.
Once a transaction is processed and verified by the bitcoin network, the private keys for that particular bitcoin are transferred to the recipient’s wallet.
To be clear, you don’t ever actually “hold” your bitcoins. Instead, you own bitcoin because there’s a verifiable chain of transactions proving your ownership of that bitcoin. The reason you “own” your bitcoin is because the last transaction of that specific bitcoin was traced to your wallet address. Your private key proves ownership, and you hold that bitcoin for as long as you own the private key.
Anyone can check bitcoin’s transaction history using a blockchain explorer. A blockchain explorer is like a search engine for a blockchain. You can search for specific wallet addresses or transactions. All of this transaction information is publicly viewable.

Nodes Compete for a Block Reward

So you’ve sent a bitcoin transaction to the bitcoin network. Next, the nodes on the network will compete with one another to verify that transaction. The first node to successfully solve that transaction will receive a block reward in the form of bitcoins. Nodes receive bitcoins in exchange for their work validating transactions and maintaining accurate records across the bitcoin network.
Once the node has verified the transaction, your recipient’s wallet will display the received bitcoins, and your wallet will no longer display your own bitcoins. The node that processed your transaction will receive a reward in the form of bitcoins.
In the next entry, we’ll learn to something more exciting i.e. how you can start earning bitcoins for yourself – including how to buy bitcoins or how to earn bitcoins by mining with your computer. 

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