Bitcoin Transactions How do they work and what should you consider?

Transactions (also known as TX) are the fundamental mechanism of any digital asset. They are not simply transfers of value; they are the immutable record that allows Bitcoin and other networks to function without requiring permission from a bank. If we want to move our funds securely and without intermediaries, we depend entirely on the execution of these transactions on the network.

Do we really understand what happens when we press "send" on our mobile phone? Simply seeing a changing balance isn't enough. Understanding the structure of a transaction is what separates a user who knows what they're doing from someone operating blindly. In an ecosystem that has already moved beyond early adoption, ignoring how this data is validated or how fees are managed is a risk you shouldn't take.

Mastering how cryptocurrencies work starts here. This isn't boring theory, but practical tools to leverage a system that gives us complete financial sovereignty. At the end of the day, every bit of information that travels through the blockchain is a piece of your digital freedom.

Understanding how a transaction works

Strictly speaking, a transaction isn't a "sending" of money as we understand it with Bizum or a bank transfer. Nothing actually travels from one place to another. On the network BitcoinThese operations are data records that modify the state of the blockchainBasically, we are dealing with an information flow that reassigns ownership of certain digital assets from one address to another.

How does this translate into practice? Imagine messages programmed and protected by public-key cryptography. When you perform a transaction, you digitally sign an instruction that tells the world: "I, the owner of these funds, authorize their transfer." Once you send that message from your computer or mobile device, the network nodes verify that your signature is authentic and that you actually have those crypto assets available.

The most powerful aspect of this system is its public nature. There are no secrets or closed offices. Every transaction is indelibly recorded in the network's history, allowing us to trace any token back to its very origin in the genesis block. It is this complete traceability that guarantees the system is auditable by any of us, without needing to rely on a third party's word. If it's on the chain, it's true; if not, it simply doesn't exist.

How do Bitcoin transactions work?

Forget the idea that cryptocurrencies travel through cables. In networks like Bitcoin, Ethereum o Bitcoin CashA transaction is essentially a status update on a shared ledger. When you trade, you don't move files; you simply tell the network that tokens previously linked to your signature now belong to another address. It's a purely digital and transparent change of ownership.

To execute this process, we use a purse or walletBut beware of metaphors: your phone doesn't hold your money. These programs are cryptographic key management interfaces that allow you to interact with the blockchain. Without them, you would be unable to authorize the movement of your assets.

What exactly does the software do? It's quite simple. It creates the mathematical proof necessary for the network nodes to accept your transaction as valid. Ultimately, the wallet acts as your legal representative within the protocol, allowing you to manage your digital assets without relying on a bank for permission to use your own capital. If you know how to manage your keys, you have complete control; if not, you're merely a spectator of your balance.

How are the transactions shaped?

Now, you will surely wonder what elements make up a Bitcoin transaction. Well, these elements are the following:

1. Inputs. Inputs are references to an output from a past transaction that has not been used in any other transaction. These allow us to confirm the origin of the assets that will be used in a transaction and are the ones that contain the address where the bitcoins were originally received.
2. Outputs. These contain the address to which the transfer is made and the amount sent. In addition, they contain the directions of change or return where the returns of the transactions are sent, so that a transaction can contain more than one output.
3. Identifier (TXid). Each transaction made will have its own hash. This hash is generated from the inputs and outputs. This value is what makes it possible to identify a transaction in a unique and unrepeatable way within a blockchain.
4. Commission rate. The fee is the small payment miners receive for processing a transaction. Thus, the miner that generates a new block will receive a fee for each transaction processed within said block. The commission does not come explicitly in the content of a transaction, that is, it is not associated with any output, since the miner who will receive that fee is not known. To do this, what is done is leave a certain amount without associating it with any output, and this will be understood as a commission for the miners.

In the following image we can see each of these sections within a bitcoin transaction.

How a transaction works

All cryptocurrency transactions share the basic structure shown above. This structure has a curious design, with inputs and outputs, but with a very specific objective: to maintain security. At all times, this data undergoes a cryptographic hashing process and asymmetric cryptography. This is what makes the information can be properly secured and validated.

In Bitcoin, this process that makes all of this possible is handled by the Bitcoin scripting. This is nothing more than a powerful programming language that makes it possible for Bitcoin to have enormous potential. Thus, and although its potential is very great, the vast majority of Bitcoin transactions currently respond to this scheme:

OP_DUP OP_HASH160 b2089ebaad05c87a6d714cc33fbaa8cf181a4e30 OP_EQUALVERIFY OP_CHECKSIG

This scheme is repeated to some extent in other crypto assets, but of course each of them has its own particularities that can improve or facilitate the handling of transactions.

An example of how a transaction works in Bitcoin

Imagine that Maria owns control of an address with 1 bitcoin. If she only wants to send Pedro 0,3 bitcoins and there is no concept of "inputs", there is no way for the system to know what part of that 1 is the 0,3 sent, and it can be resent. For this reason, there is the concept of inputs, to which the bitcoins that arrive at an address are associated.

In this way, enough tickets are collected to reach the desired amount. If to reach 0,3 you have had to select 3 inputs of 0,12 each, the result being 0,36, the remaining 0,06 are sent to your own address, indicating it as the output next to the address to which you are assigned. I wanted to send 0,3.

That is, we would have this scenario of inputs and outputs:

The proper address where the remaining 0,06 BTC is sent can be the same address associated with the inputs or a new one. This is called direction of change o  return address. It is where the laps are sent.

It is also important to understand that in the same transaction there can be as many entries from the same address, or several, as desired. The same goes for the exits. This allows multiple shipments to different people with a single commission payment to the miners in the same transaction. This functionality is exploited by some wallets to save costs.

Internally, the protocol for rewarding miners comes from funds that are not allocated to any address. All remaining bitcoins in a transaction that are not assigned to any address the miner keeps them that mine the block with your transaction inside and they are impossible to recover.

So, keeping these points clear, to carry out a transaction on the Bitcoin network, the issuer must have access to both the public addresses and the private keys associated with those bitcoins, which are nothing more than a random set of numbers and letters without a definite pattern. The private key is what allows us to sign and send a transaction as owners of certain bitcoins, while the public address works like an email address or a bank account number where we are going to make or receive the transaction.

Types of existing transactions in Bitcoin

Coinbase:

A coinbase transaction is what allows miners to generate or activate new crypto assets., with which they can receive mining rewards. In the case of Bitcoin, the first transaction made was called a coinbase. And it was not carried out from one person to another, but rather it was carried out by the same network as a generating transaction. Through which the entire Bitcoin system was brought to life.

Mining nodes can add only one coinbase transaction for each new block generated. Thus, the system ensures that the miner receives only the reward that corresponds to him and that new coins that have never been inside the blockchain come into circulation.

In the coinbase, the fees of the transactions processed by the miner are also added. So this type of transaction contains the sum of the block mining reward plus the commissions of the processed transactions. It is generally located as the first added transaction within a new block.

If you want to go deeper into this interesting topic, we invite you to take a look at our article What is coinbase transaction?

UTXO

UTXOs are unspent coins. In the Bitcoin protocol, transaction inputs (inputs) are also called UTXOs from a previous transaction. That is, outputs from a transaction that are not spent or used. And they basically contain the change or returns product of a transaction.

For example, if you have 1 BTC in your wallet, these are likely to come from multiple UTXOs. Which can be 4 of 0.25 BTC each. If you want to spend a total amount of 0.30 BTC on any product, you will see that you do not have any UTXO with that specific amount. Although your wallet will show a balance of 1 BTC in total to simplify things.

The truth is that UXTOs cannot be divided. So when you trade for 0.30 BTC, what you are actually sending is 0.50 BTC (2 UTXOs in this case). And your wallet creates two exits: one for the merchant who you are going to cancel the 0.30 BTC and one for you with 0.20 BTC How do I change or turns. The existence of the UTXO is what allows the operation of transactions Child Pays for Parents (CPFP). This is a transaction with a higher mining commission in which the UTXOs of an unconfirmed transaction are moved. This is to make the parent transaction that generates them commit faster.

What is the process for creating transactions that send crypto assets?

To send crypto assets, you need two things: one steer axle truck and a private keyBoth parts are handled by the cryptocurrency wallet.

First of all, the address is actually the public key of the owner of the crypto assets. This could be, for example, the keys that grant access to bitcoins. What makes these keys so secure is that both are a sequence of letters and numbers generated using highly advanced and random mathematics. Thus, the address (the public key) follows a specific and unique pattern that begins with the character "1". The fact that it starts with one indicates that it is a Bitcoin address and not another type of digital asset. Of course, each crypto asset has a first character that distinguishes it from the rest.

In turn, the private key is generated from a unique and unrepeatable seed that you or the software you use automatically assigns to you. The fact that they are unique and unrepeatable guarantees that no person has identical keys and is an essential part of security. In this way, brute force attacks that could jeopardize our funds cannot be carried out.

The outline of this process would be more or less the following.

But going back to the scenario of Maria and Pedro, we have that when María wants to send bitcoins to Pedro, she uses her key or private keys to sign each one of the entries of the transaction (the origin). This is done transparently by the wallet, that is your task.

For example, Bitcoin uses asymmetric public and private key encryption. In this way, the nodes. they can quickly validate if the transaction is authorized by its holder. For this, they can corroborate the validity of the source address, which is the public key, as we have previously said. Once approved, this transaction is retransmitted and shared by all nodes in the network, registering it in their corresponding blockchains.

Some nodes are also miners. These will use that transaction, along with thousands of others, to solve a mathematical problem. In this way, we can send Bitcoins (and other cryptocurrencies) completely securely and in seconds, to anywhere in the world.

What if I only want to send part of a bitcoin or another cryptocurrency?

A common concern for those new to the world of cryptocurrencies is how to send a payment, given that the value of many cryptocurrencies exceeds one dollar or one euro. The trick is that many cryptocurrencies can be divided to eight decimal places. In other words, they can send amounts as small as one hundred millionth of their value.

In Bitcoin, the units of account They allow us a wide variety of micropayments. In fact, the smallest unit, the "satoshi" (in honor of the creator of Bitcoin, the unknown "Satoshi Nakamoto") is the smallest value we can have in Bitcoin.

However, in Bitcoin there is a sending limitation that prevents sending values ​​less than 546 satoshis (0,00000546 BTC), known as dust transactions. This is a measure of protection to the network to avoid dusting attacks on the network.

Similar measures apply to other crypto assets, all created to prevent network congestion and attacks that could disrupt its proper functioning.

Advantages of Bitcoin transactions

Speed

While making a transaction through the traditional financial system requires hours or even days for approval or denial. In Bitcoin, everything is much faster, easier and cheaper.

It does not require intermediaries to process and approve the operations, but rather its system is based on a network of interconnected nodes that validate the information contained in the transactions. Making the process much faster, safer and more reliable.

Irreversibility

Once a Bitcoin transaction is made and added to the blockchain, it is virtually impossible to reverse or modify. In addition, cancellations or refunds are not available in this system, after the transaction is made, which generates a great advantage in several areas of economics and finance.

Security

Bitcoin transactions are made using public addresses and private keys. Where private keys give you the right to spend bitcoins as if it were a pin or password. And public addresses allow you to send or receive bitcoin transactions without the risk of theft.

Cheaper commissions

The fees paid to miners to process a transaction are really low compared to the percentages requested by banks or other traditional systems.

A transaction with crypto assets, regardless of the amount sent, can cost only a few cents, since fees are not calculated based on the amount of the transaction, but on its size.

FAQ – Bitcoin Transactions