A Bitcoin Transaction in Depth - UNDERSTANDING THE BLOCKCHAIN; Episode 6
Hey there! Welcome to another episode of Understanding the Blockchain.
You can check out previous episodes here:
So, we’ve been exploring the origin of the blockchain in earlier episodes, we’ve talked about bitcoin and its timeline. In this episode, we’ll explore what a bitcoin transaction entails in depth.
A bitcoin address is like a digital mailbox where a user can send bitcoin to. It is a series of alphanumeric characters with upper and lowercase which looks something like this:
We’ll discuss how these addresses are generated and what they mean later on. All you need to receive bitcoin although is this address; to access the bitcoin sent to this address however, you will need something called a PRIVATE KEY.
Each time a bitcoin address is generated, a private key is created as well. You don’t need to do anything technical to create this, probably just the click of a button or so. The address is used to receive payments while the private kay is used to unlock these payments. A private key looks something like this, similar to an address but longer:
Most times, applications are used to handle these keys as they are long and pretty impossible to remember. With applications, you might just need to scan a QR code or save them in a device.
Once bitcoin is sent to an address, it is similar to dropping an item into a drop-box and depositing that drop-box on the blockchain. Only the owner of the drop-box has the keys to open it up and remove the items.
What is the blockchain then?
It is just a giant ledger comprising of all the bitcoin transactions. We’ll discuss the block and the chain components late on because there is a special mathematical relationship between new transactions and old transactions; there is bunch of security benefits that makes it tamper resistant. For now, though, all we need to know is that it is a place that stores the history of transactions.
Now in actuality, there isn’t one single copy of the blockchain. There are actually 10,000+ copies of the blockchain distributed across the globe on the computers of miners. Each of the computers that mine bitcoin and confirm transactions keep a full copy of the blockchain. So, as you can rightly imagine, there is a lot of work that goes down in keeping 10,000+ computers around the world in sync at all times and we’ll cover how that works in coming episodes as well.
This is the central building block that bitcoin and cryptocurrencies stem from.
This means that when someone sends you bitcoin, the bitcoin doesn’t technically come into your possession. The bitcoin is sitting somewhere on the blockchain where no one else can access. All you have is the private key to that address which you can use to access the bitcoins. So, when bitcoins are stolen or when an exchange is hacked, there is actually no physical process involved. All that happens is that the private keys are somehow exposed.
See you in the next episode as we further explore the beauty of the blockchain technology.