Bitcoin transactions are messages stating the movement of BTC from the sender to the receiver. But how do Bitcoin transactions work?

Using cryptography, transactions get digitally signed and then sent to the whole Bitcoin network for verification. What’s great is that there’s no intermediary for the transaction, and it’s faster than bank transfers.

Read this guide and find the detailed process behind Bitcoin transactions.

How Do Bitcoin Transactions Work?

There are several steps involved in this process. Let’s explore each one.

Creating a Transaction

When people want to create a transaction, they generate a new address for sending Bitcoin or a ‘cryptographic key pair,’ which consists of a private and a public key. The public key is used to receive Bitcoins, while the private key can be used to sign transactions and spend bitcoins.

This digital signature proves you own the BTC you want to send. The new Bitcoin address is a unique public key, and the user’s wallet contains the matching private key. Using the public key, anyone can check if the message signed with the private key is valid.

Once verified, you can broadcast the Bitcoin transaction to the network.

Submitting a Payment

The Bitcoin transaction process continues with this step. When the transaction is signed, it is broadcast to the Bitcoin network and transferred to the mempool, where it waits to be approved.

Miners can form new blocks using transactions from the mempool. The first one to solve a mathematical problem can make the next block. The winner broadcasts the new block, which the rest of the network confirms.

How is a transaction verified on a cryptocurrency network?

Each participant propagates the transaction until it reaches nearly all the network’s nodes. If you heard something like a Bitcoin transaction in the blockchain, that refers to a mining node verifying the transaction, which is then included in a transaction block recorded on the blockchain.

Transaction Finalization

What is the BTC transaction’s process end like? When the transaction is recorded on the blockchain and approved by sufficient subsequent blocks, it is added to Bitcoin’s open-distributed ledger and stays there permanently. That means that all participants accept the transaction as valid.

Still, for a transaction to be considered final, it should at least have six confirmations. That means six more blocks should be added after the one with your transaction.

This practice ensures the transaction won’t be double-spent or reversed if a temporary blockchain fork occurs. The BTC that the new owner receives as part of the transaction can be spent on a new one.

But what happens to unconfirmed Bitcoin transactions? The network may completely ignore them, or they may get dropped from the mempool and returned to the user’s wallet.

Why Do Some Bitcoin Transaction Confirmations Take So Long?

How do Bitcoin transactions work in terms of speed? Two primary reasons impact Bitcoin transaction confirmation speed: network load and transaction fees. Let’s first explain the part about the fees.

There’s only a specific number of transactions each block can contain. The number is mostly determined by each block’s available space. The limited space creates the fee market, where miners typically choose higher-fee transactions. So, if fees are lower, so are the confirmations.

Moreover, transactions are stored in the memory pool and stay there until they are confirmed by miners. If there are many transactions, this pool can become congested, slowing down the confirmation time.

How Fast Are Bitcoin Transactions per Second?

Does Bitcoin transaction take a lot of time? On average, Bitcoin processes seven transactions per second or 420 transactions per minute. That translates to 25,200 transactions per hour and more than 600,000 transactions daily.

Even though this seems like a lot, it’s actually relatively low compared to more established transaction systems. One such system is Visa, which handles 65,000 transactions every second.

How Do Bitcoin Transactions Differ from Traditional Financial Transactions?

How do Bitcoin transactions work differently than fiat transactions? Take a closer look at this part.

  • Decentralization vs. Centralization: While traditional financial transactions (TradFi) are centralized and need intermediaries like banks, BTC transactions are decentralized, and no government or institution controls them.
  • Ownership: With traditional financial transactions, banks control the funds and have the authority to freeze accounts, whereas once you buy Bitcoin, you fully own your funds.
  • Transparency vs. Privacy: TradFi transactions are private and not publicly accessible even though banks have that information. At the same time, Bitcoin transactions provide transparency, as they are stored on a public ledger and are visible. However, that doesn’t mean people also know who the hidden identity behind the address is. Still, there are ways to trace Bitcoin address owners.
  • Speed and Accessibility: With traditional financial transactions, there’s limited availability outside of business hours, and the processing times are slower, whereas you can transact Bitcoin from anywhere, anytime, at a faster rate.

Conclusion

Bitcoin is considered the crypto with the most potential. So, how do Bitcoin transactions work? Three primary steps are involved in this process: creating the transaction, submitting a payment, and finalizing the transaction.

However, the transaction confirmation speed depends on the network load and transaction fees. Typically, Bitcoin processes seven transactions per second or 420 transactions per minute.

What sets Bitcoin transactions apart from traditional financial transactions is their decentralized nature, the sole ownership of the holder, wider accessibility, and faster speed.

FAQs

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