On February 5, 2020, the Bitcoin network reached an impressive indicator: 500 million transactions were approved since it started operating in 2009. It has been operating for more than 10 years with no flaws in its code, and each of these transactions was properly recognized and validated. To understand how this is possible, and how transactions on the network work, let's first explore what Bitcoin is.
Before starting, an important distinction must be made. There is the Bitcoin protocol, which is the network operates in a decentralized way - that is, there is no person or entity that controls the transactions or issuance. Your bitcoin payments are geographically unrestricted and can be made from anywhere on the planet for anyone. The system was created in 2008 by Satoshi Nakamoto - pseudonym of a person who remains anonymous to this day. On January 3, 2009, at the height of the 2008 financial crisis, it started operating.
As part of this network we also have bitcoin as a token, which is the cryptocurrency itself. It is this second element that we are referring to when we say that “so and so has 0.543 bitcoins”, and represents the amount of tokens. Although both terms are called “bitcoin”, the custom is to refer to the network as Bitcoin, with a capital “B” and the token as “bitcoin”, with a lower “b”. The distinction is important for understanding bitcoin transactions and their characteristics.
The Bitcoin system
The entire bitcoin system is based on blockchain technology , which is nothing more than a global ledger, responsible for controlling the balances of all the addresses of a cryptocurrency - in this case, bitcoin - over time. To understand bitcoin transactions, you need to pay special attention to the concept of address.
An address consists of two keys: public and private. The public key is the one that identifies you in relation to other members of the network. It's like your bank account - something that needs to be public in order to send and receive funds from others.
The private key is your password. Using the private key it is possible to move the public key, just as it would be possible to move a bank account. This knowledge is essential when it comes to knowing how transactions between portfolios work.
The balance at the address
The balance at any Bitcoin address is public. For example, when looking at address 399jCwmobQzpjP9hd4WEGXbhtLMv47gr6q we see that it has a balance of 3.35 bitcoins, resulting from 20 transactions.
Incidentally, this address used in the example belongs to the Bitcoin Market, and was created to raise funds for the Hospital de Cirurgia de Sergipe . The funds will be used to expand the number of ICU beds in the hospital!
Thus, it is possible to consult the extract of any Bitcoin address. The big issue is that it is not possible for a third party to whom the address belongs - anyone who queries that address at random cannot know that it is associated with the Bitcoin Market or that it is part of a donation campaign.
A bitcoin transaction
The life of a Bitcoin transaction goes through a series of steps:
1. Requisition:
a transfer request is made by a user to the network. Suppose you would like to buy a cheese bread for R $ 5.00, and you will pay in bitcoin. The seller gives you his address, you enter the recipient and the amount of bitcoins needed to make the payment;
2. Verification:
in the case of the Bitcoin network, to check whether the transaction is valid, two parameters will be considered: whether you have enough balance and whether the private key used to move your funds is valid or not. This is a very quick process, which takes a few seconds;
3. Addition to a block:
the transaction is joined to a block along with several others, and miners will compete to solve the puzzle of that block, seeking a reward for new bitcoins created for the winner. You can view this process of adding transactions to a block on the BitBonkers website;
4. Addition of the block to the blockchain:
once a miner has solved the puzzle, the block is added to its version of the blockchain, which will be transmitted to the other participants in the Bitcoin network, who will update their version of the blockchain with the longest version being transmitted. The puzzle of each block is created from a code, and its difficulty is proportional to the computing power of the Bitcoin network at the time of creation - however, the code creates a puzzle that takes, on average, 10 minutes to solve . That is, every 10 minutes a block is added to the network. This is the first confirmation of the transaction;
5. Adding next blocks:
once that block has been accepted as valid, the network will compete for the next solution. For each subsequent block that is added to the network, the transaction has one more confirmation.
The bitcoin token
The bitcoin token can be used as payment in several physical stores and internet sites, as long as the buyer has the appropriate balance and the seller has a Bitcoin address. This map shows ATMs and stores that accept bitcoin worldwide. Despite being used in transactions, it has a number of features that differentiate it and conventional currencies, such as the real or the dollar:
Decentralization
No person or institution controls the Bitcoin network. All tokens stored in their own wallets are completely controlled by the owner, and no one can move them without the private key, ideally known only to the holder, or to a few people close to him. The network is managed through a computer that runs the Bitcoin program, which is publicly available and open to anyone's suggestions. The code itself is managed by a group of volunteer programmers. If you are interested in running the code, and helping the network to verify and approve transactions, you can download the program here .
Emission limitation
National currencies theoretically have no emission limit. Of course, it is necessary to be careful on the part of the government, so as not to create excessive inflation. If the government is wrong in its management, it is possible to see notes such as Zimbabwe's 100 trillion dollars.
However, central banks can inject new resources into the economy - we saw this in practice during the COVID-19 pandemic, with governments injecting trillions of dollars into the economy. Still, there are other mechanisms that central banks have to control the currency.
Unlike national currencies, the Bitcoin network code has a programmed issue limit of no 21,000,000. In other words, only 21 million bitcoins can be issued in the entire history of the network. In addition, no one can control the supply - around 18.3 million bitcoins have already been issued , of which it is estimated that just over 16.3 million are in circulation . The difference is “lost” bitcoins, that is, of wallets that have not been used for many years, and that it is assumed that the owners have lost the private key. Among these 2 million coins we also have “spotted” bitcoins, which we will explore further below.
Movement identification
We are unable to track national currency notes, such as reais, dollars or euros. It is even possible that these banknotes were used in illicit activities - a study showed that 90% of the real banknotes have traces of cocaine.
In bitcoin, it is possible to know exactly which currencies were involved in illegal activities. Because they are nothing more than specific lines of code, it is possible to trace all bitcoins back to their origin, and all the way through their existence.
For example, suppose an online wallet was hacked, and 10 BTC were stolen, and transferred to the hacker's wallet. These bitcoins can be "marked" as a product of theft, and whoever carried out the theft will find it difficult to move these "spotted" bitcoins.
Decimal places
In our daily lives we are used to dealing with coins divided to two decimal places. For example, we can say that a coffee costs R $ 3.50 at the bakery. Even in commercial situations the exception is gas stations, with some of them calling fuel prices up to 3 decimal places.
The most daring investors can also point out that currency pairs in Forex markets can vary in “pips”, or “percentage-in-points”, or a unit in the fourth decimal place. That is, the smallest variation that a pair like USD / EUR (dollar / euro) can have is US $ 0.0001.
Even so, they do not reach bitcoin tokens, which can be divided into up to 8 decimal places. That is, the smallest unit of bitcoin is ₿ 0.00000001 - unit popularly known as "satoshi", in honor of the creator of the cryptocurrency. This means that even with the price of Bitcoin at around R $ 30,000 in the last few weeks, a satoshi is worth only R $ 0.0003, allowing microtransactions even easier than national currencies.
Network transactions
We saw earlier how a bitcoin transaction works. Now that we understand better features of the bitcoin token, we need to know that transactions made with it have some particular characteristics. It is important that the user is familiar with them before making transactions, so that he can use the network properly.
Confirmations
We affirm that the miners confirm the transactions, adding them to a block and solving the puzzle generated by the block. However, only confirmation is weak evidence that a transaction has been carried out properly.
This is because the fact that a miner has found the solution to a block does not necessarily mean that it will be immortalized in the blockchain. If other network participants find that that block contains an invalid transaction, for example, they will reject the block. Thus, competition for the bloc, whether or not it contains the same transactions, begins again.
It should be remembered that each subsequent conformation, after the first, makes the computational power required to tamper with the blockchain progressively higher. The math behind it is complex, and the curious can see Satoshi's explanation on page 8 of his whitepaper .
The fact is that after 6 confirmations it is the number needed to ensure that the chance of the transaction being valid is 99.9%, sufficient for the vast majority of users. Rolling back a 6-block transaction would require monstrous resources in energy and computational power, which makes the reversal impractical and without any economic sense. Therefore, the general rule of thumb is to wait 6 confirmations - about 1 hour - to ensure that a transaction is fully valid.
This is one of the main reasons why a bitcoin transaction is secure. Subsequent conformities increasingly decrease the chance of a transaction being reversed or considered invalid. Nowadays, someone who wants to reverse transactions from even a few days ago would probably have to spend hundreds of millions of dollars, which makes this type of operation economically unfeasible.
Immutability
When we have problems with a credit card transaction, we can usually request a chargeback from our bank. Perhaps the transaction was made fraudulently, or the consumer himself was wrong.
However, transactions made with bitcoins are immutable, and cannot be reversed. There is no middleman to turn to to indicate which transaction should be undone. Once the transaction has been registered on the blockchain, it will remain there as long as the network is functioning, it is not even possible to contact the party who owns the other address, as it is very difficult for ordinary users to know each other's identity.
That is, sending funds to 38zV1uySXgv4NLueuJxpXsp3sABR6VFBQs (wrong address) instead of 38zV1uySXgv4NLueuJxpXsf3sABR6VFBQs (correct address) can make all the difference. Remembering that this is the address of the Bitcoin Market campaign to raise funds for the Hospital de Cirurgia de Sergipe !
So it is always important to pay close attention when making transfers between Bitcoin addresses. Of course, most transactions are made with “ CTRL + C and CTRL + V ” resources, which makes it difficult to have an error. In addition, Bitcoin addresses are traditionally associated with QR Codes, and simply scan the code to enter the correct transaction address.
Are Bitcoin transactions anonymous?
When making a credit or debit card transaction, several participants in that payment chain - such as the company that operates the brand and the issuing bank - have access to the transaction information. This is mainly due to issues of prevention of money laundering and terrorism.
On the other hand, when we make a cash transaction, there is total anonymity. It is impossible to track a cash transaction, and neither seller nor buyer need to know or use intermediaries.
There is a general impression that bitcoin transactions are also anonymous, which is only partially true. Bitcoin transactions are made using a pseudonym, which is the address on the network. As we said, when an order goes to the network, users do not identify themselves - the miners only go through the entire history of the blockchain and confirm that that address has the balance necessary for the transaction, and that the correct authorization is provided to move those funds. The network user does not know who included his transaction in the blockchain, nor does the miner know whose ownership of the addresses involved is owned.
However, there are already several methods for finding out who is behind each address. In addition, all serious cryptocurrency brokers have sophisticated customer identification mechanisms and strict rules against money laundering and misuse of resources. Therefore, users of bitcoins will almost always be identified at the stage of transforming their reais into bitcoins and vice versa.
In other words, in practice, it is as if the transactions were conducted under a pseudonym. Your identity is camouflaged, but it can be discovered using the right methods. Bitcoin is definitely not anonymous.
Advantages of Bitcoin transactions
The main advantage of bitcoin transactions is that they are significantly cheaper than traditional value transfers. There are still rare banks that do not charge TED and DOC fees, even in national transfers. In addition, international transfers can cost up to 20% of the total transaction amount in extreme cases.
Even when it comes to means of payment, fees can be high. We often do not notice, because the cost falls on the merchant, but credit cards can charge 2 or 3% of each transaction. Meal voucher administrators can keep up to 13% of the purchase price. They are certainly significant costs.
In the Bitcoin system, the fee paid is that of the miners. The remuneration serves as a stimulus for faster inclusion of the transaction in question in the next blocks, and more agile confirmations. Although it exists, this rate is not even close to the values charged in the traditional market. In January 2020, a whale - a name given to investors with large amounts of bitcoins - transferred $ 1.1 billion by paying a fee of $ 80, or 0.000007%.
These rates are variable - the busier the network, the higher the cost, because the user must pay the miners better, so that their transaction is approved in front of others that offer a lower rate. It also depends on the size of the transaction, of course. In late 2017, when the price of bitcoin increased dramatically to nearly $ 20,000 and the asset received global attention, transaction fees averaged $ 37. However, situations like this are the exception, and the rule is still mining costs below $ 0.50 per transaction.
Cautions when carrying out a bitcoin transaction
Verify the address
Transactions between bitcoin addresses are irreversible. Therefore, great care is needed when carrying out any type of operation. Check several times if the shipping address is correct, and if all the numbers of letters match - remembering that the addresses are “ case sensitive ”, that is, there is differentiation between uppercase and lowercase letters.
Another point that the user should pay attention to is the correct cryptocurrency address. There are several cases of people who have lost their funds by transferring to different cryptocurrency addresses. For example, if, through an oversight, someone transfers bitcoins to a Tether wallet, the transaction will be invalid, of course, and as it is immutable the resources are lost.
Check the transaction fee
The transaction fee varies depending on the priority the customer requires. The faster someone wants their transaction to be confirmed, the greater the amount they must pay miners. In the case of the Bitcoin Market, the confirmation fee is fixed at ₿0,0004.
Confirmations
Of course, the number of confirmations required depends a lot on what is being negotiated. When buying cheese bread, initial validation is usually sufficient. If the person is selling an apartment and receiving in bitcoins, it is recommended to wait even more than the 6 transactions of the general rule.
The Bitcoin Market requires, for cryptocurrency deposits, 3 confirmation of the transaction on the Bitcoin network. The verification requirement varies from cryptocurrency to cryptocurrency.
As a curiosity, we can see below the first transaction made with bitcoins, on January 3, 2009, which has more than 600 thousand confirmations.
Conclusion
A bitcoin transaction can be very advantageous, especially when compared to traditional alternatives in terms of fees. However, it also requires care. Some peculiarities were added to bitcoin transactions so that the network could work in a decentralized way. We hope this article has helped you better understand how bitcoin transactions work!
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