Bitcoin Explained #2 - Transactions!

Greetings guys! Yesterday, I started this new series delving into the inner workings of Bitcoin! Today, I will start digging a bit deeper into how it all comes together, starting with one of the most important parts – the transactions!

Bitcoin is, after all, a huge intricate system for transactions of money. As such, I will now make sure you go into the 5% of people who actually know how this works.

Let’s get started, shall we?

1 – Every transaction ever made with Bitcoin goes on the blockchain

Mind blowing stuff, isn’t it? Yet it’s the truth. If you downloaded Bitcoin Core, and downloaded all blockchain data, after a couple of days, you could soon have all transactions ever made with Bitcoin at your fingertips.

I will approach the blockchain itself in more detail in a future article. Hell, if you want more info, I’ve even made an article in the past that did pretty well, feel free to check it out, though it only covers the basics.

For now, just know this – the blockchain is as an amazing ledger that makes every detail of every transaction made with Bitcoin public. And every 10 minutes, it gets updated.

If you read the Bitcoin white paper, made by Satoshi Nakamoto, you will come to the conclusion that it’s 80% blockchain, 20% Bitcoin. This system was made from ground-up to work with Bitcoin.

Let’s get back on track though. How exactly do these transactions work?

2 – Transactions are based on authorizations, not physical transfers of money

How would you define a transaction in today’s world?

You would probably picture a physical setting, in which a client gives out money in exchange for a product, and as such has less money.

Or maybe using your bank account, deducting money from it in order to buy whatever you want?

Bitcoin changes that. Because the money is virtual, what matters is the amount of money the network perceives you to have. And the network does this by analyzing your inputs and outputs.

In English – a transaction in the blockchain is basically you authorizing a transfer of bitcoins from point A (yourself) to point B (the receiver). The receiver can then do the same on to point C (another receiver) and onward from there.

The sending of Bitcoin from an account is called an input in the account. Receiving Bitcoin in an account is an output towards that account. Inputs and outputs don’t need to have the same account… and to make things more interesting, they don’t add up to the same amount.

Remember me mentioning mining a while back? This is where it comes in.

3 – Every transaction goes in a block – and the one who mines that block gets a share

The blockchain consists of a series of blocks chained together in a linear fashion. That’s the dumbed down version of it, and for the moment, it’s what I’ll give you. The blocks don’t come out of nowhere, however.

They are produced by miners - people who devote a large amount of computational power to solve a complex mathematical problem. Once they do, all transactions made till then are added to the block – and the miner takes a bit of the transactions, making up the difference between inputs and outputs.

Anyway, once a transaction gets made, its’ essential information goes in a block. That block contains the signature of the person who authorized the exchange – that signature is nothing less than that person’s private key.

Pretty simple, right? There’s a little more to it than that.

4 – There are many different types of transactions

Transactions can take up many shapes and sizes.

The most common one isn’t one where you wallet sends the exact amount you want to send – it’s one where the wallet sends in excess, then collects the change is another transaction from the person you transferred the original sum to.

Another kind of transaction is where your wallet picks up a lot of change it has lying around and piles it up into a single output. This is an aggregating transaction.

Another is when you do many operations at once – your wallet picks up a big amount of the Bitcoin you have, and makes many different outputs. This, which happens say, when paying many people, is known as a distributing transaction.

Have I wetted your appetite for more? Well, I’m afraid I’m all done for today! Tune in next time to find out more!

That wraps this up!

Next time, I’ll approach transactions more from a programming side of things, show you the nuts and bolts of what goes on in your computer when you make a transaction.

Again, I point out that most of this info comes from the great book “Mastering Bitcoin”, which you should definitely get around to reading!

Finally, sound off in the comments below if you have a question or criticism you’d like to make!

Till the next one guys! Steem on!