Bitcoin Basics Lesson 4: Bitcoin Wallet: Your Most Precious Thing
December 14, 2017
Bitcoin Basics Lesson 6: How to Buy Bitcoin!
December 16, 2017

Welcome to Bitcoin Basics Lesson 5: Transactions and the Blockchain
In Lesson 4, you learned that there’s a wide range of wallet solutions available to you as a consumer. You also learned that bitcoin wallets do not actually store bitcoins, but rather they store the private and public keys used to handle your bitcoins.

In Lesson 5, you will learn:

  • A bitcoin transaction is a transfer of value via the Bitcoin network
  • Bitcoin transaction records are not encrypted
  • Transactions can be viewed by anyone using a ‘blockchain explorer’
  • Transactions must be verified by miners on the blockchain network
  • Miners are rewarded with bitcoins for doing verification work

Bitcoin Transactions on the Blockchain

The blockchain is a public ledger where every bitcoin transaction is recorded. The ledger is maintained by a network of communicating computers running bitcoin software. It operates without any central authority.

Transactions are sent to this network using wallet applications. Mining computers and nodes try to validate these transactions. Valid transactions are added to their individual copy of the ledger. Each computer will then broadcast their ledger additions to the other nodes in the Bitcoin network.

The blockchain is a distributed database. This means that to achieve independent verification of the chain, (the correct ownership of each and every bitcoin amount), each participating computer stores its own copy of the blockchain and all of its transactions. A transaction typically references previous transaction outputs as new transaction inputs and dedicates all input bitcoin values to new outputs. As such they constitute a chain of transactions. Therefore, it is also possible to “trace” a particular bitcoin back in time (to check which addresses the bitcoin has “visited”).

To clarify: bitcoins don’t really ‘exist’ anywhere. There is no file with bitcoins in it. Instead, there are records of transactions between different bitcoin addresses with balances that can increase and decrease.  And while each bitcoin transaction is secured via encryption, the record of that transaction is not. This enables the ability to browse and view every transaction ever collected in the blockchain using a hex editor. There are also blockchain explorers online where every transaction included within the blockchain can be viewed in human readable language. 

A Practical Example of a Bitcoin transaction

Step 1: Submission of Transaction to the Bitcoin Network via Wallet
Alice wants to transfer bitcoin to Bob and they both have bitcoin wallet apps on their smartphones. Bob opens his wallet, creates a new bitcoin address, and shares this address with Alice. She pastes Bob’s address into her wallet’s “Send to” field, she also inputs the amount of BTC she wants to transfer. Alice’s wallet (also called a client) signs her request with her private key corresponding to the address she’s transferring from.

Step 2: Verification
Now the bitcoin mining network goes to work. Connected computers all over the world simultaneously verify all transactions, and compete with each other to earn newly minted bitcoins as a reward. Bob and Alice’s transaction, once verified, will be added to the next transaction block. Once the block has been found by a miner, their transaction is confirmed, and can no longer be reversed. When this process is done, Alice and Bob’s wallets will display that the transaction is complete. This verification process ensures that the same bitcoins cannot be used for more than one transaction at a time.

This ends today’s lesson. You now know that transaction records stored in the blockchain are not encrypted and can be viewed by anyone using a blockchain explorer available online. You have also learned that transactions need to be verified by miners on the blockchain network, who are then rewarded with bitcoins for doing the work.

Tomorrow’s lesson will cover how you can earn some bitcoins of your own.

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