How Do Bitcoin Transactions Work?

Navigating the World of Bitcoin Transactions: A Comprehensive Guide

The message is digital and the transaction reference number is unique

In the usual form of payment systems, we often have a network of banks that execute the transaction for us. A peer-to-peer system means that the payment can be conducted between two friends on the network without involving anyone in between. In this system, we will not be using anyone else like a bank.

All transactions need to be recorded for future reference — banks do so in what we know as our statement of accounts.

In the peer-to-peer system, the network of peers or participants will conduct this job. In the present system, the banks are trusted by all participants — they act as a trusted third party to the transaction between two individuals.

In the peer-to-peer system, participants do not need to trust anyone — the transaction will have to provide cryptographic proof of its genuineness. It does so, in a very simple manner.

When you are initiating a transaction into the network, you will have to use a bitcoin, that you have received and not spent yet. It is called an unspent transaction. You take this transaction, write down to whom you need to send it to, how much, and then sign it.

Very much similar to writing a cheque. Only digitally. So, the message is digital, the transaction reference number is unique and your signature is your digital signature. Putting all these variables in a particular sequence, you construct your transaction message and broadcast it to the network.

The network has nodes or computers that validate the data and arrange them in its proper sequence. So, your message hits the mempool or a pool of unverified transactions. From this pool, your transaction is picked at random and the validator runs a few tests on it.

Firstly it checks if your transaction is a truly unspent one — if you are trying to spend your coin twice, it will fail this test and your request will be rejected. Once this passes through, it will then verify your digital signature is genuine or not. If it is, then the verified transaction will be validated and allowed to be recorded in the digital ledger.

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