Let’s suppose you sent someone a Bitcoin, Ethereum, or other cryptocurrency, and they received it within a short time( around half an hour).
Now, you will think this transaction was just a game of your single click. It will feel like magic that you only clicked the “Send button” and the other person received it instantly, without an intermediary or any verification.
However, dear readers! The reality is not what you think or believe it is. If you ever find out what’s happening under the hood, you will surely be shocked.
To eliminate such an illusion( this transaction process is straightforward) from your minds and increase your knowledge, I have written this blog lesson for you.
Hoping! Once this lesson is finished, you will have a clear understanding of how crypto transactions work.
What Are Crypto Transactions?
This article’s intro would have given you a slight idea about crypto transactions. However, for a clear understanding, let’s have an example.
There are two crypto users, named “Jackson and Prince”. Jackson wants to send an Ethereum to Prince for any purpose or for his service. Here, he will open his digital Crypto Wallet, enter Prince’s address, the crypto amount, and hit the send button.
After a short time, Prince will receive this Ethereum, and Jackson’s wallet will show that “1 Ethereum has been sent successfully from Jackson to Prince”. This process, from sending to receiving this cryptocurrency, is called a transaction.
Definition: “A Transaction is a digital transfer of cryptocurrencies from one user’s wallet to another on a decentralized blockchain network”.
After this brief overview, let’s navigate to the cornerstone section of this blog: How crypto transactions work.
How Crypto Transactions Work?
This section is the detail of how crypto transactions work. From your click to the confirmation on blockchain, everything will be covered in this section. I will describe each phase of this process from A to Z.
Phase 1: Transaction Initiation
This process begins when a person who has to send cryptocurrency to another crypto user initiates a transaction. Here, he/she open their crypto wallet and enter the specific information, including;
- Sender’s address: First of all, the sender writes their own wallet address.
- Receiver’s address: This is the wallet address of the receiver( who will receive this cryptocurrency).
- Specific amount: Specific amount means how many Bitcoins or Ethereum the sender wants to transfer.
It’s time for a digital signature: After entering this information, the sender has to sign this transaction using their Private keys. This digital signature is a mathematical code that ensures that the transaction was created and authorized by the owner.
Phase 2: Transaction Verification
After entering this information and signing the transaction, the sender hit the “Send” option. As soon as the sender hits this option, the system sends the transaction to a specific blockchain network (depending on the cryptocurrency) for detailed verification.
If you want to know what happens during this phase, read the text below.
1. Sign verification: The system verifies the digital signature to ensure the transaction is authorized by the cryptocurrency owner.
2. Double-sending Check: The nodes check and ensure that the sender has not previously used the digital coin in someone else’s wallet
3. Fund availability check: They also verify whether the sender’s wallet contains the specific amount of crypto coins.
4. Format checking: Nodes verify that the transaction is valid and formatted properly. In short, this transaction should comply with the blockchain network rules.
Phase 3: Mining & Staking(Transaction Storage)
If I say this is the most important phase of this crypto transaction process, it will not be wrong. Once nodes have verified this transaction, they package it into new blocks. In short, during this phase, the system creates new blocks and stores the transaction in a way that no one can alter or delete it.
However, these blocks are created by two different consensus mechanisms, “Mining and Staking”. Let’s discuss them briefly.
Mining(Proof-of-work): The nodes that want to participate in the mining mechanism must have computational power. Now, they are given some tricky or complex puzzles. After solving them, the blockchain network allows miners to validate the transactions and create new blocks.
Staking(Proof-of-stake): Here, the system selects nodes to create new blocks and permanently store the transactions in them. It chooses these validators or block creators based on how many coins they stake—the more coins they stake, the higher their chances of becoming validators.
➜Learn deeply: How Blocks Are Added to the Blockchain.
Phase 4: Finalization
The nodes finalize and add newly created blocks to the blockchain. Here, the transaction is permanently stored( as discussed in the previous section). This is the point where the receiver receives the cryptocurrency( sent by the sender).
The system rewards nodes (miners and validators) with new coins and transaction fees for their extraordinary role.
But remember:
| “This fee is charged from the sender’s wallet and given to them”. |
The fee charged by a sender depends on several factors. I have listed a few of them in the section below.
- Transaction speed: If anyone wants the transaction to be confirmed and stored quickly, they have to pay a higher fee.
- Transaction size: The size of a transaction is directly proportional to the transaction fee charged to the sender.
- Cryptocurrency: It also depends on which digital cryptocurrency you are sending to someone. For example, Bitcoin has its own transaction fee, and Ethereum has its own.
And so on……….
Final Thoughts On How Crypto Transactions Work
Dear readers! The process of cryptocurrency transactions often seems straightforward. However, what actually happens under the hood, very few people are aware of this.
In this blog, I have explored a comprehensive guide on how crypto transactions work. From transaction initiation to block creation, everything has been discussed in a detailed manner.
Hoping! After this guide, you will never consider this transaction process as just a one-click game again.
