How Bitcoin Transactions Work? Full Bitcoin Transaction Process with Example

Bitcoins use public-key cryptography to ensure that each transaction is well secured and integrated on the respective network. A transaction means the transfer of Bitcoin value on this blockchain. 

In simple terms, a transaction occurs when one person owning a Bitcoin gives a certain amount or value of Bitcoin to another party. Each cryptographic transaction is recorded in an online public ledger.

In order to transfer Bitcoins, or carry out Bitcoin transactions, each party has pairs of public keys and private keys. These keys control the pieces of Bitcoin they own. 

A public key is a group of letters and numbers that Bitcoins owners share in order to process the transactions (to receive funds). 

On the other hand, a private key must be kept secret because it authorizes transactions involving the spending of funds received by the related public key.

With the use of this private key associated with Bitcoin, the user can sign his or her transactions and thus, also be able to transfer the value to the new owner. Further, the transaction is broadcasted on the network to include it in the blockchain.

Here is a better illustration of the transaction with an example where Jess sends 0.05 Bitcoins to Alex.

Any transaction has three parts- 

1. Input

The Bitcoin address contains the Bitcoins Jess wants to send. This is the amount that Jess had received previously and is now willing to spend.

2. Output

It is the public key of  Alex or you can say the Bitcoin address to receive funds.

3. Amount

The amount that Jess wants to send Alex.

Now, for Jess to send funds to Alex, she signs a message inclusive of details related to the transaction using her private key. The message contains all three parts— input, output, and amount.

Then, this transaction is broadcasted on the network (blockchain) where the nodes verify the accessibility of the private key of Jess to transfer the find to Alex. This is done by checking that Jess’s private key matches the public key that she claims to own.

After passing through the node, it passes further along in the network until it reaches the node where it can be mined. Then, the miners will order this transaction into a block template. A block template is a blueprint for the block which the miner is attempting to add to the network. 

When a miner finds the next block on the blockchain, then this block is mined and it becomes immutable. Lastly, this block is broadcasted to the nodes of the network to include it in the copy of the blockchain.

Bitcoin users control how they quickly transact by including the fee rate. It is seen that the higher the transaction rate, the faster the transactions are processed. 

A block in a blockchain contains up to 1MB of information. As space is limited, only a limited number of transactions can be processed or included in each block. 

Miners receive both newly mined Bitcoins and relative transaction fees for ordering transactions into each block. This means that they get incentives to offer priority to transactions with increased fees. 

When there is network congestion, or too many users are willing to transact, the fees for transactions are mostly included in the next block.