How Do BitCoin Transactions Work?

Bitcoin is a digital currency, the first example of what is now called cryptocurreny. Bit is generated by volunteer coders known as ‘miners’. These miners use computer software to solve mathematical equations. Their solutions are rewarded by the generation of BTC. The Block Chain serves to monitor and secure transactions as the data is shared verifying the bitcoin’s owner and availability. As digital concepts are not always intuitive, the bitcoin phenomenon has prompted many to ask, “How exactly do bitcoin transactions work?”

Bitcoin Wallets

While bitcoin wallets are known as bitcoin storage locations, the wallets don’t actually contain the bitcoin; what they do contain is the address of the bitcoin. That address keeps a ledger of all the owner’s transactions and balance. The address is known as the ‘public key’ because everyone can see it. That seems un-secure, but the public key only works in partnership with a corresponding ‘private key’. The private key is the part you don’t want to share.

Transaction Validation

Any transaction you make via your bitcoin address requires a signature from your private key. This is done by putting the private key and transaction details into the BTC software. The program then produces a digital signature that is sent to the network for validation.

The validation involves confirming that you own the bitcoin, who you are transferring it to, and that you have not already sent it in another transaction. This is done by entering the public key into the program. If the cryptographic signature corresponds to the public key, the transaction will be validated, without even the program knowing the private key. After the validation, the network confirms the bitcoin balance wasn’t already spent; it does this by going through the address history (public key) through the public bitcoin ledger.

The Block Chain

Once your transaction is fully verified, it enters a ‘block’ with numerous other transactions. Each block contains data including a hash of the preceding block, forming a blockchain. If any part of the previous block is altered, it, in turn, changes the current block’s hash. So each block’s data is dependent on the other blocks in the chain. This is why the bitcoin transactions are virtually tamperproof because to change one transaction, the other blocks have to be altered as well, and while someone is working on one block, subsequent blocks are always being added.

Cryptocurrency could be the way of the future. As so much of the ways in which people interact, shop, bank, research, and share takes place digitally, it seems only a matter of time before the monetary system catches up to this modern phenomenon. Bitcoin is a fascinating system utilizing P2P networking in such a way that the power of shared data helps safeguard and verify each individual transaction. Without the necessity of a third-party regulator, miners crunch algorithms to generate bitcoins, which are protected by their address containing information regarding their owner and history. Once a transaction is verified, it becomes a part of blockchain technology.