How bitcoin transactions work?
Bitcoins have become the most popular form of cryptocurrency in Singapore. The fact that it is decentralized makes it easier to transact from one source to the other. Moreover, it puts some people to ease as no large national entity controls the bitcoin network. Satoshi Nakamoto, the elusive creator of the bitcoin cash system, created it to get rid of the frustrating financial processes of the traditional banking system. In addition, to a great extent, it has managed to overcome the challenges of the conventional financial system. Unlike other forms of currency, bitcoin users can anonymously have multiple bitcoin addresses and make huge bitcoin transactions quickly. Apart from transactional benefits, bitcoins are also consider to be a great investment option. Considering the fact the value of bitcoins keeps fluctuating, people invest in bitcoins just as they would in stocks or mutual funds.
Having said that, can you hold onto your bitcoins forever? You will at some point in time have to spend your bitcoins or make a transaction using them. So, how do you plan on doing that? For someone who has never transacted bitcoins, the whole process of how bitcoin transactions work can be baffling.
Here is a basic guide to what happens in a typical bitcoin transaction:
Key terms to understand:
- Blockchain: A blockchain is a public ledger of all your bitcoin transactions. This is accessible to everyone. It is continuously growing as new blocks are added with every transaction. So every time bitcoins are credited or debited to you, that transaction is recorded in the blockchain in chronological order.
- Private key: To send bitcoins across to a different person or entity you need something called the private key. This key is just like your email id password, it is known only to you. And, you shouldn’t share it with anyone else, unless you want your bitcoins to be stolen.
- Public key: The private key is used to mathematically derive the public key. The public key is nothing but a transformed algorithm of your private key. This is used to generate the bitcoin address.
- Bitcoin address: A bitcoin address is a single use token. It’s just like your email id, but in this case, every time you send an email to someone, you use a different email id. The bitcoin address is generated with the help of the public key. To sum it up, people have different bitcoin addresses and a unique address is generated for every transaction.
- Bitcoin network: To understand how bitcoin transactions work, you need to be well versed with the bitcoin network.
The Steps involved
To make a bitcoin transaction, you need three things:
- An input
- An amount
- An output
Let’s assume Jane wants to send bitcoins to Dan. So, the input is the bitcoin address that was used to send bitcoins to Jane from her another source. In fact, the amount is the total number of bitcoins Jane wants to send to Dan. Lastly, the output is Dan’s bitcoin address.
Step 1: The transaction
Jane will initiate a payment using a bitcoin wallet software like electrum or bitcoin core. She sends the desired amount of bitcoins to the bitcoin network. In fact, bitcoin wallets keep a secret piece of data called a private key or seed. This private key is used to sign every transaction Jane makes. The signature prevents the transaction being alter by a third party.
Step 2: The processing
Jane will put the input, the amount and the output and sign the transaction after which it gets process. As mentioned above all bitcoin transactions are recorded in the bitcoin blockchain and to get a transaction processed, a data miner needs to approve your transaction. Data miners are a specialised computers or group of computers on the bitcoin network. Every 10 minutes, they collect a few hundred transactions and transform them into blocks.
The next step involves miners competing with each other to solve the blocks, which are mathematical equations. The miner who solves the equation processes it and showcases the proof of his work in the bitcoin network. After this is done, the other miners in the network approve the proof of work and the miner who solve the equation will get 25 newly process bitcoins. In fact, this is an incentive for all bitcoin miners to mine bitcoins.
Step 3: The transfer of value
At the end of all this, the desired amount of bitcoins get transferred to Dan’s bitcoin wallet. Jane will be able to check her wallet to verify the completion of the transaction. Just as you store money in bank account, bitcoins must be stored in a bitcoin wallet.
So, this was a brief on how bitcoin transactions work. We hope this guide will help you kickstart your journey in the bitcoin network. If you wish to start trading with bitcoins, there are many bitcoin exchanges that log into such as Coinmama, Coinbase, and CoinHako. You can also become a bitcoin miner. This can be done by building your own bitcoin mining machine or opting for cloud bitcoin mining.
It’s not difficult to learn more about bitcoin transactions and start doing themselves. Apart from earning bitcoins, you can also use it as currency to make payments or to receive them.
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