Bitcoin Transactions: How it works and benefits of using crytocurrency instead of money

22nd January 2018 | CPC TEAM

Bitcoin transfers are one of the most confusing parts for those who are new to the crypto-currency ecosystem.

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For sure you already have an idea about how the usual electronic transfer operates. There are two parties and a middle man. The two parties want to electronically move money from one side to the other. To do so they need a middle man that provides the service, call it a Bank, Paypal, Western Union, etc. who will always take a hefty percentage of the money being sent.

What is Different when Transferring Bitcoin?

In the first place, the middle man is now out of the equation. Transfers are made from Peer-to-Peer (P2P) using Bitcoin Wallets. This is digitally signed for security reasons.

The Transaction Structure Involves 3 Pieces of Information: Input > Amount > Output

Assuming that Michael wants to send Bitcoins to James, the first piece of information is the “Input”, which specifies the address from where Michael holds Bitcoins. The second piece of information is the “Amount” that Michael want to send to James, and the third is the “Output”, which would be James’s wallet address.

The transfer is distributed through the network and registered in a vast general ledger (public record) called Blockchain that validates all transactions. This means that everyone can find out about transactions being made and trace their history to the point of its inception. To send Bitcoin, both the address (public key) and the private key assigned to your Bitcoin wallet are needed.

At the time Michael wants to send Bitcoins to James, the private key is what he will use to sign the message that includes the input, amount and output (James’s address). After the Bitcoin is sent from Michael’s wallet into the BTC network, miners will verify the transaction, put it on a transaction block and solve it. This verification process made by miners can take up to 10 minutes or less. The Bitcoin protocol is set on that time frame to mine each block. You should wait until the process is fully confirmed, but usually some merchants will trust on you assuming that you will not try to spend the same Bitcoins before the process is completed.

You will not always have to pay transaction fees, but that doesn’t mean you shouldn’t. Wallets usually let you manually set the transaction fees. Miners usually process transactions for free as they are rewarded by the block (with Bitcoin), but we might see miners starting to raise some low fees in the future, as the block reward decrease.

Sometimes there are portions of transactions that the recipient doesn’t pick up or is considered as change. This is usually considered a fee or a tip for the miner’s good job! All in all it is a fairly simple process once you understand all the working parts.

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