Hello guys and gals, I'm Nate from 99Bitcoins,
and welcome to Bitcoin Whiteboard Tuesday!
Every few weeks we’re going to send you a cool new video, just like this one,
explaining some basic concepts around Bitcoin.
This way you can learn about Bitcoin yourself
or forward these videos to friends or family members who have questions.
Today’s topic is the path of Bitcoin from “send” to “receive”.
In this episode, we’re going to go over exactly what happens to a single Bitcoin
from the moment you hit the “send” button in your wallet
until it’s received on the other end.
Hopefully, once we finish this lesson,
you’ll have a good understanding of how the Bitcoin network works
and what’s the role of each specific player in the Bitcoin ecosystem.
So let’s get started!
The path from send to receive has 3 parts: Signing, broadcasting and confirming.
Let’s start with the first part – signing.
When I hit the “send” button in my wallet,
what I’m actually doing is telling my wallet:
“Hey wallet, I want to send 1 Bitcoin to my friend Steve.
Here is Steve’s Bitcoin address.”
The wallet, in response, creates a transaction message
containing information about me, the sender, Steve, the recipient
and the amount being sent (in this case, one Bitcoin).
Afterward, the wallet produces a unique digital signature for this message
by mathematically mixing it with my private key.
In our previous lesson, I’ve discussed the concept of the private key.
It’s basically a long string of letters and numbers
that act as the “password” for your Bitcoins.
Whoever knows my private key has control of my Bitcoins.
A digital signature is a way to prove that I own the private key to my Bitcoins
by using only my public key which I have no issue exposing,
thus keeping my private key, well, private.
Also, digital signatures are different each time you sign a transaction –
that’s why they are even more secure than a real signature
since they are unique for each and every transaction.
So if I send Steve one Bitcoin today and then another Bitcoin tomorrow,
each of these transactions will have a different digital signature.
After signing the transaction message, the wallet then groups the signature,
along with my transaction message, into a small file.
And this concludes our first step of signing.
Now we can move on to the next step – broadcasting.
In the broadcasting step, the wallet starts sending out the file
to other computers that hold a copy of the Blockchain.
These computers are also known as nodes.
Each node that receives the file verifies that it’s legit.
It’s basically looking to see that I actually have the funds I want to spend
and that my signature checks out,
much like a banker would check your account balance
before clearing your check.
Once my file is verified,
it’s then passed on to other nodes in the network that repeat this process.
When a node receives a file,
it keeps it in a holding area called the Mempool.
The Mempool, short for memory pool,
is a space dedicated for valid but still unconfirmed transactions.
Once the transaction message finds its way
to the Mempool of the different online nodes on the network,
we can say the second step of broadcasting is officially finished.
Now I want to take a quick pause
and talk about the status of our transaction at this point.
In order to actually see what’s going on with our transaction
while it’s making its path along the Bitcoin network,
we can use a block explorer.
A block explorer is a tool, usually in the form of a website,
that allows you to search and navigate through the Blockchain.
Using a block explorer,
you can check the balance of different Bitcoin addresses,
track transactions and get a wide variety of statistics about the network.
So at this point,
if we look at our transaction through the block explorer,
we will see that it is marked as “unconfirmed”,
meaning that it was broadcasted to the network and had its digital signature verified
but it still isn’t part of the Blockchain.
This type of transaction is also referred to sometimes as
a zero confirmation transaction.
An unconfirmed transaction should be treated as its name implies – unconfirmed.
This means that the transaction can still get canceled,
and there’s no guarantee it will ever enter the Blockchain.
If your business sells or ships goods and you accept payment in Bitcoin,
you should never accept an unconfirmed transaction
as a proof of payment.
Now we can now move on to the final step – confirming our transaction.
If you’ve watched our previous lesson about Bitcoin mining,
then you already know that miners group transactions together,
meaning they take those files sitting around in the Mempool,
group them together and create a block of transactions.
There is a limit to how many transactions can be inserted into each block.
Therefore, miners will usually pick the transactions that have
the highest mining fees attached to them first.
Miners will then compete with each other
in order to get their block into the Blockchain.
The mining competition is based on mathematical calculations,
and the miner with the most computational power
will have the best chance of winning.
Once a miner wins the competition and gets his block into the Blockchain,
all of the transactions that were in that block
will be considered as confirmed.
Basically, the miners are writing the history book of Bitcoin transactions,
and whoever wins the competition gets to write the next page.
On average, a new block of transactions will be mined,
or inserted into the Blockchain, every 10 minutes.
Keep in mind that this is on average.
Sometimes you’ll get 2 blocks confirmed within 1 minute,
and sometimes it can take more than an hour.
If a block was mined with your transaction in it,
you’ll notice it will now show on the block explorer
as having one confirmation.
As more and more blocks are added afterward, the confirmation number will grow.
Think of it as a building of blocks with our block at the very bottom.
Every additional block set on top of our own block
makes it harder to remove.
That’s why it’s usually suggested to wait for at least 6 blocks
before considering a transaction as fully confirmed
without any chance of cancellation.
That’s it!
Our transaction is now fully confirmed and received.
Hopefully, you now have a better understanding
of how the Bitcoin network operates.
If you have any additional questions about what we just covered,
feel free to leave them in the comment section below.
I hope you enjoyed this episode of Bitcoin Whiteboard Tuesday,
and I’ll see you… in a bit.