Do you know how a Bitcoin transaction works and looks like? What exactly is a blockchain transaction? The technical mechanism is actually quite simple to understand, not just for the tech-savvy. See for yourself.
The Nature of Blockchain Transactions
In blockchain terminology, the term “transaction” can be a bit confusing because it doesn’t necessarily refer to a financial operation but rather an interaction with the blockchain that results in the RECORDING of data on the blockchain. Sending Bitcoins from one wallet to another is a transaction because it involves recording on the blockchain. Creating a token on the Ethereum blockchain is also a transaction because it’s a record on the blockchain. It’s good to keep this in mind.
Bitcoin Transactions in Focus
In the context of Bitcoin, a transaction most commonly refers to the transfer of Bitcoin cryptocurrency from one address to another. But what does its digital form look like? What is recorded in the Bitcoin blockchain when a transaction becomes an integral part of it?
The Anatomy of a Bitcoin Transaction
The format and data structure representing a Bitcoin transaction are quite specific. However, the construction of a transaction is very simple: a transaction has INPUTS and OUTPUTS.
Understanding INPUTS
The INPUTS of a transaction are existing outputs in the blockchain, known as UTXOs (Unspent Transaction Outputs), created by a previous transaction. UTXOs are essentially digital coins and banknotes because they represent a portion of the Bitcoin cryptocurrency. The data includes simply the number of Bitcoins specifying a particular UTXO, e.g., 0.82 BTC. Additionally, there’s data authorizing access to these outputs, in other words, proof that the existing UTXOs were sent to you, confirming that the Bitcoins are yours and that you have control over them. These proofs can include cryptographic signatures generated by a cryptocurrency wallet, and wallets have cryptographic keys.
Deciphering OUTPUTS
The OUTPUTS of a transaction include new UTXOs intended to be controlled by the recipient. These are the Bitcoins for them and optionally change for the sender. But when is there change? If a transaction had 1 input UTXO worth 1 BTC and the recipient is supposed to receive 0.6 BTC, the transaction outputs will be two UTXOs: one 0.6 BTC for the recipient and the other 0.4 BTC as change for the sender.
How a Bitcoin Transaction Works? Simple, right? Understanding Bitcoin transactions can be straightforward once you break down the components and processes involved. This is a technical orange pill, a knowledge capsule about blockchain.
I design and build enterprise IT solutions based on blockchain technology.
I am blockchain architect in Trans.eu building ECMR (digital CMR Consignment Note) based on blockchain. I teachabout Bitcoin, blockchain and decentralization via Linkedin and blog: https://mobycrypt.com.
