A bitcoin transaction is a transfer of value between Bitcoin wallets that gets included in the blockchain. Bitcoin transactions are irreversible and immune to chargebacks. A common misconception about Bitcoin is that it is entirely anonymous.
Every transaction on the Bitcoin network is logged and available to view on websites. While users can create pseudonymous identities, all transactions can be traced back to their origin.
So, how does this work?
Phases of a Bitcoin Transaction
Transactions are verified by network nodes through cryptography and recorded in a dispersed public ledger called a blockchain. Bitcoin is unique because there are a finite number of them: 21 million. Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services even by trading bots like Bitcoin up.
Here are the four phases of a Bitcoin transaction:
Setup Phase 1: Generate Bitcoin Address and Private Key
A Bitcoin wallet is like a key that can be used to open up a Bitcoin address, and it is also the equivalent of an email address, which you can use to receive Bitcoins from other people. In order to access your Bitcoin wallet, you will need your Bitcoin public key and private key. Your public key is used to generate your Bitcoin address that can be shared with other people for them to send you Bitcoins.
A Bitcoin Address can be used to send and receive Bitcoins. The Private Key is what enables you to do those actions. A public key can be thought of as the Bitcoin address of an individual, while the private key is like your username and password that gives you access to your account.
A Bitcoin Address can be created by:
The user chooses a string of random characters (typically 12 or more) as their bitcoin address, and wallets typically automatically generate a corresponding private key for the user.
The details of each transaction are collected every 10 minutes and saved in a new block. When a predetermined number of transactions have been gathered, they will be sealed into a block. Blockchain is decentralised; it is not managed by any central entity like banks or governments. This means the system cannot be tampered with or hacked.
Setup Phase 2: Fund the Bitcoin Address with Bitcoin
Phase 2 is used to add a bitcoin amount to the address of a wallet, which is recorded by the computer in the form of a transaction.
It is crucial to understand this phase and what it entails when managing your account balance. Phase 2 involves adding bitcoin to an address that you are using for your bitcoin account. This will involve depositing bitcoin from your wallet into an address for it to be recorded on the blockchain as a transaction.
When you want to deposit money into your bitcoin wallet, the money is first transferred to a bitcoin address which is the account number. Once funds are transferred, the transaction is verified and will be completed once enough network nodes accept it.
The transaction process begins with generating a bitcoin address for the recipient of funds. These addresses are used to receive Bitcoin. Wallets generate as well as store such addresses.
Steps for depositing Bitcoin into your bitcoin wallet:
- Write down or copy your address
- Transfer Bitcoins from your Bitcoin exchange
- Scan the QR code on your Bitcoin Wallet
- Enter the amount of Bitcoin you want to send as well as the transaction fee (optional)
- Click on “Send Funds.”
Setup Phase 3: Send Bitcoins from One Wallet to Another
Bitcoin transactions are a somewhat complicated process that beginners do not easily understand.
The first step of the transaction is to create an address in your wallet from which you will send coins to another recipient’s wallet. After you have done this, you need to make sure that you have enough funds available in your chosen account to send money and that any fees have been paid.
If not, this stage can be skipped and will continue to the next stage. The Bitcoin network allows transactions where one person can send a set number of bitcoins from their personal “Bitcoin wallet” to another personal wallet.
For a transaction to be accepted and validated, the sender needs to have a private key corresponding to the receiving public key. These transactions are recorded on Bitcoin’s blockchain and need confirmation from the majority of nodes to be established as valid.
Setup Phase 4 – Create a Bitcoin Payment Request
Creating a Bitcoin Payment Request (BIP) is easy. You have to know the customer’s information, such as their email address or bitcoin wallet ID.
Bitcoin Transaction Phases:
- – A Bitcoin transaction requires a sender, recipient, and an amount for input in the form of bitcoins.
- – The system automatically generates a bitcoin address for the recipient, which can be shared with the sender over email or SMS text message.
- – The sender then clicks on “Send” and enters the number of bitcoins they want to send to the recipient in addition to an optional memo. The memo is what will be given when trying to locate this transaction later on if there are any problems with it being appropriately processed by miners and nodes on the blockchain network.
Commit Transaction Phase – Broadcast Transaction to Nodes in Network and Wait for Confirmation
The bitcoin transaction phase is the last in executing a bitcoin transaction. It is the last step where one waits for a confirmation of their transaction.
Confirmation happens when a miner solves a cryptographic puzzle, which takes about 10 minutes. If the miner finds the answer to this puzzle, they confirm that the person who created this bitcoin transaction has enough mining power, and then they broadcast it to all of the other miners on that network. This way, other miners on that network know to accept this single miner’s solution as truth and not just any old solution as truth.