What separates the bitcoin network from traditional banking or payment system is actually its decentralization at it is core. Unlike central banking systems or any centralized authority, bitcoin transactions do not need third-party trustees. Meaning that trust is eliminated by the emerging power of verification of the interactions of different participants in the bitcoin system.
So how does a simple transaction happen over the bitcoin public ledger (blockchain)? In order to understand what a bitcoin transaction is, we first need to visit: What is a public ledger?
Bitcoin Public Ledger (Blockchain):
Blockchain is a list of validated and back-linked blocks (think of it as a data model for transactions) throughout the genesis block (the first block in blockchain). It serves as a record-keeping technology that is immutable and secure. Therefore, it is unattainable to attack the system or forge the data stored on it.
You may have heard of the famous slogan — “ Don’t trust, verify”. So with that in mind, let’s look at how transactions happen in the P2P public ledger at a high level.
Overview of a transaction:
The transaction journey starts with its origination. First, the transaction needs a signature (one or more) to authorize to transfer of funds. Then, it is propagated all across the bitcoin network and validated by each node. Finally, it needs verification. I will be discussing this in more detail in the following section but here’s the sneak peek. A miner takes the transactions to in her node and verifies by the action called proof-of-work. Now, it can be added to the public blockchain to be permanently recorded and acknowledged by other blocks.
Before Transaction:
After a transaction is originated, the source funds must be signed by one or more owners. Properly created and signed transactions are now valid and contain all the information needed to process the transfer funds. Finally, the valid transaction must reach the network to be propagated until it reaches a miner to be included in the blockchain.
During transaction:
The bitcoin ecosystem is based on verification by a computation, not a third-party trust. Transactions are stored in blocks to be verified by other blocks. In order to verify a transaction, there should be an effort. This effort requires enormous computation to validate the transaction, but a little computing to verify it as a valid transaction — this process is called “mining”.
Think about mining as a process of solving a very complex hard computational puzzle. It is actually what it is. When miners find a block to mine, they immediately begin racing against each other to solve a math puzzle. When it is solved this action is called “proof-of-work” (PoW). The miner uses SHA 256 to hash random numbers and place them in the nonce to see if it matches.
Every second that is spent during proof-of-work requires tremendous operations all across the entire network. The more miners discover the block, the difficulty level for solving it increases drastically.
That is to say, long live miners!
At first, a transaction is not verified until it is included in the blockchain. A transaction needs a miner to generate a new block that incorporates all the previous transactions. Therefore, the transaction is put into a pool of unverified transactions. From there, as soon as a miner generates a new block, they take the transaction to add it to a new block and immediately start solving the puzzle. The validated transaction is added to any node on the peer-to-peer network and will be propagated and connected to its peers.
After Transaction:
In the Bitcoin network, the transaction tells the network that the owner of the chunks of bitcoins allows some of those bitcoins to be transferred to another owner. The new owner can now spend these bitcoins in a chain of ownership by creating another transaction authorizing the transfer to another owner.
Cheers to new sound money!
