How Exactly Do Bitcoin Transactions Work?

How Exactly Do Bitcoin Transactions Work?

Bitcoin transactions are digitally signed for security and are sent to bitcoin wallets. For this to happen, your bitcoin wallet and a bitcoin network should go through several steps to help the recipient get the right amount of assets.

The smallest part into which a bitcoin can be divided is called a satoshi, which equals to one hundred millionth of a bitcoin.

Components of a Bitcoin Transaction

A bitcoin is a record that includes three components: an amount, a transaction input and a transaction output.

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  • A transaction input is a bitcoin address from which the assets are sent.
  • A transaction output is an address to which the assets are sent. For example, if you have the bitcoin in your wallet, then this is an address you can control.
  • The amount is the amount of digital currency that is sent.

When you (person A) send a bitcoin to someone, your wallet forms a transaction output which is technically the address of the second party (person B) - a person to whom you are sending the assets. This transaction will be registered on the bitcoin network with an address as a transaction output. When this person afterward sends these bitcoins to a third party (person C), then, their address becomes the transaction input, and a person C’s bitcoin address will become a transaction output.

Due to this scheme, people can keep track of transactions from the very beginning - when the bitcoin was first created, and understand who sent it first. This mechanism produces a transparent system where every transaction can be checked at any point of time.

Bitcoin Transaction: a Step by Step Guide

How to Send the Needed Amount of Assets

The main point to understand is that the amount tied to these transactions cannot be divided. For instance, if a person A has a bitcoin address with two bitcoins in it, he cannot send only one bitcoin to a person B. However, this transaction is possible if a person A sends two bitcoins. Then the network will automatically create one bitcoin in change from the bitcoins that were sent by person A, and send it to a person B. This third party address becomes a transaction output, meaning that this address will eventually have multiple transaction outputs.

How the address can be changed

Taking this into account, sooner or later the bitcoin wallets end up with plenty of addresses that contain different amounts of bitcoin and change from these transactions. It means that when you send a bitcoin to someone, your wallet will collect the needed amount using the different addresses. This process leads to a transaction that has a few various inputs. Over time, this means that bitcoin wallets end up with lots of addresses containing various amounts of bitcoins and change from bitcoin transactions. It is almost impossible that these inputs will make up precisely the needed amount, that’s why you usually end up with change.

What if you need to send just a little part of bitcoin?

Fortunately, you can cut bitcoins into very tiny pieces. The smallest part into which a bitcoin can be divided is called a satoshi, which equals to one hundred millionth of a bitcoin. Because it is too small, you cannot send this part to anyone as it will disrupt the network by breaking it into tiny transactions. The smallest transaction starts from 5340 satoshis, which is still quite insignificant.

Transaction fees

Many bitcoin transactions require a transaction fee, meaning that you have to pay a certain amount on top. Otherwise, the transaction will fail. You should consider this if you decide to send a tiny fraction of a bitcoin.

Conclusion

That’s why, when you look at your bitcoin wallet after making several transactions, you can see multiple addresses that include small amounts. It can make a bookkeeping process a bit annoying. However, this is the thing that makes bitcoin transactions transparent.

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