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A Bitcoin Process Analysis

Transactions

This blogpost is designed to explain how Bitcoin transactions are made.

The information is structured for people who have a general understanding of what Blockchain technology is, but want to learn more about the technology’s inner workings.

What is a Bitcoin Transaction? 

Bitcoin is based on a Blockchain ledger of transactions. A Bitcoin transaction is a string representing the transfer of Bitcoin from one public address to another. Every entry in the Bitcoin Blockchain refers to a transaction. Each transaction is organized in an ordered sequence from oldest to most recent in the ledger.

This digital transaction ledger is replicated on every one of the millions of computers operating on the Blockchain. Each computer has to agree with every transaction from the very first one to the most current one, for the transaction to be valid. This process insures security, prevents fraud, and 

determines how much Bitcoin is in each person’s Bitcoin address

Wallets and Addresses and Keys, Oh My!

For a transaction to execute, both the receiving and sending parties must have a Bitcoin wallet. A bitcoin wallet is a file that gives users access to Bitcoin addresses. An address is a string of letters and numbers that identify Bitcoins. When a user wants to make a Bitcoin transaction, the receiver creates a new Bitcoin address for the Bitcoins to transfer to. The receiver then shares the newly-created address with the sender. The sending party uses this address as the transaction input for which to transfer Bitcoins to. 

The sending party then proceeds to specify the desired amount of Bitcoin to transfer to the receiver’s Bitcoin address. For a transaction to go through, both the sending and receiving parties must have a private and a public “key” for each Bitcoin address in play. Public and private keys are generated so both parties have an official record of who was involved in the transaction. The private key is never shared and is later used to validate transactions. Before the transaction is finalized, it is confirmed as “valid” using cryptography to make a digital signature. Digital signatures come into the online world using the sending party’s private key of the address they are transferring Bitcoins from to ensure the sending party is legitimate and consenting to the transaction. 

What is the General Consensus?

In order to conduct future transactions, all users of the Bitcoin Blockchain must agree on the existing content in the Blockchain-based on the status of the accounts tracked by the public key in that ledger. The Bitcoin Blockchain is a “trustless’ network, meaning no central authority authorizes transactions. Instead, users rely on a consensus algorithm to validate transactions and add them to the ledger. The job of consensus algorithms is to ensure that reliable nodes are the ones adding things to the Blockchain, prevent double spending, ensure transactions are tamper-proof, ensure the payee possesses the Bitcoin they are transferring, and ensure there is no foul play and an agreement is carried out to both parties’ specified terms. 

Bitcoin users the Proof of Work Consensus Algorithm (POW).

The Virtual Pickaxe

The Proof of Consensus Algorithm adds transactions to the Blockchain using nodes or “miners” that compete to add transactions to the Blockchain. Since this key is public, anyone on the network may use the public key of the sending party to legitimize the transaction. A transaction is added to the Blockchain (and thus completing the transaction) by nodes that attempt to bundle transactions from the last ten minutes into a “BLOCK.” To do this, miners first verify the digital signature of the sending party, using special computers. These computers are designed to calculate cryptographic hash functions. You can think of these specialized computers as the virtual pickaxe dedicated to mining Bitcoin or adding Bitcoin to the Blockchain. The validated transactions are combined to create a block. Once a node validates a block, it is added to the last chain on the Blockchain following the longest-chain-rule (the rule that miners must add blocks onto the longest chain). A hash is generated in the process of validating a block.  The hash cryptographically secures the block to the previous block by transforming the data into an alphanumeric string (the hash value).  The result is tamper proof because any changes on the Blockchain would mean that all following blocks on every computer node on the Blockchain would have to change, requiring enormous amounts of time and computing power. These dramatic changes would have to occur while blocks are still being added to the chain daily, making it statistically impossible. 

Written by Aubree Kitzmiller – Moore  
(18 -Year-Old Daughter of Josh Moore Founder and CEO of NFN8)

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