You would be amazed to know that while the bitcoin network facilitates transactions worth millions and billions of dollars, bitcoins per se don’t physically exist anywhere. Yes! That’s right. The bitcoin balance in your wallet is completely dissimilar to the cash you hold in your in your bank account.
Unlike physical money, the bitcoin network stores only records of transactions between different addresses in a huge distributed ledger named the blockchain. The transactions are updated and the numbers are broadcasted across the network as and when the balance increases and decreases. If you think about it, the numbers reflected in your bitcoin address don’t inherently have any value. The numbers have value because someone else is willing to trade their goods and services for a higher number in their bitcoin address and believe others will do the same.
Here’s what a sample bitcoin transaction looks like
Let’s suppose you want to send some bitcoins to a friend. The transaction will be broken down into three parts.
1. An Input: This is a record of the bitcoin address from which you initially received your bitcoin that you want to send to your friend.
2. An Amount: The amount of bitcoin you wish to send across.
3. An output: This will be your friends public key; which is also known as the bitcoin address
How do bitcoin transactions work?
To make the transfer of funds over the network safe and secure, Bitcoins address consists of two keys. i.e private key and public key. The public key is a string of randomly generated sequence of letters and numbers which is used to receive and send money over the network. Since most people have doubts about it, let’s just make it clear that sharing your public key can never result in loss of your bitcoin fund. In fact, sharing your public address is mandatory for transfer of bitcoins. On the other hand, the private key is an address made up of a sequence of letters and numbers which is used to authorize your transaction. Think of the private key as a digital signature which should always be kept private and never shared with anyone.
In the aforementioned example, you want to wire some bitcoins to your friend. To enable that, you will use your private key to sign a message with transaction specific details. After the transaction is signed, the process of fund transfer begins.
How long will it take for your transaction to be confirmed?
Once the transaction is signed by the sender, it enters the unconfirmed status since the transaction is unverified. Before the transaction can enter the confirmed status and get updated in the public ledger, it should be verified be miners. The verification process can vary from 10 minutes to two hours. However, on average the fund transfer should take an hour to get updated on the blockchain.
Are there any transaction fees?
For every fund transfer, you are required to pay a transaction nominal fee. These transaction fees are calculated on the basis of different parameters. Some wallets even allow users to manually set their transaction fees. If any portion of the transaction isn’t picked up by the recipient or is returned as change, it is considered a fee. The miner lucky enough to solve the transaction then receives the fee as a reward.