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Bitcoin Transaction

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What Is A Bitcoin Transaction?

What Is A Bitcoin Transaction?

A Bitcoin transaction is the transfer of bitcoin from one address to another address or when new bitcoin is created. Transactions can also be the transfer of bitcoin from multiple sending addresses to multiple receiving addresses.

Coinbase Transactions

The first transaction in each block is a special kind of transaction to compensate bitcoin miners for the costs associated with operating their mining hardware and maintaining the security of the network. For their work, miners receive 2 forms of compensation for each block they mine called the block reward.

The block reward is made up of 2 parts.

– Newly Generated Bitcoin
– Transaction Fees (Miner Fees)

Since these transactions are how the base of 21,000,000 bitcoin are created, they have been appropriately named coinbase transactions.

All bitcoin comes into existence via coinbase transactions.

IMPORTANT: Coinbase transactions are not to be confused with the San Francisco based crypto exchange “Coinbase”. Unfortunately, this may cause some confusion for new users.

Standard Bitcoin Transactions

A standard bitcoin transaction is when bitcoin is transferred from one address to another.

Each standard transaction contains 4 pieces of essential information for understanding what addresses sent bitcoin, what addresses received bitcoin, how much was sent, and the transaction fee to send it.

– TXID: Transaction ID
– 1 or more Transaction Input
– 1 or more Transaction Output
– Transaction Fee (Miner Fee)

TXID: Transaction ID

TXID is short for Transaction ID or Transaction Hash and is a unique 64 digit ID for each and every transaction on the Blockchain.

In order to look up the details of a transaction using a block explorer, you’ll need a TXID.

Here’s what a TXID looks like: 1f33f1e075057e0b84de03d2ef0464b90c59a4291340fb81134726065f41c672

Instead of only using a base-10 number set (0-9), TXIDs use a base-16 number set (0-9 and a-f) called Hexadecimal or Hex for short.

Inputs & Outputs

Every bitcoin transaction is made up of inputs and outputs. The inputs are the bitcoin that is being sent and the outputs are the bitcoin being received.

Depending on what sort of transaction you are creating, there can be a number of different combinations of inputs and outputs. Some transactions may only need a single input and a single output while larger transactions (such as transactions sent from bitcoin exchanges) can have hundreds of inputs and outputs.

If you look at any given transaction on a block explorer, the sum of all of the inputs will always equal the sum of all of the outputs plus the miner fee.

Every Bitcoin Transaction: All Inputs = All Outputs + Miner Fee

Transaction Fee

A bitcoin transaction fee, commonly known as a miner fee, is the amount of bitcoin that is attached to a transaction in order to incentivize bitcoin miners to add the transaction to the blockchain.

This is an important part of the financial incentive for miners to continue mining and keep the network secure. The greater the miner fee, the greater the incentive for miners to add it to the blockchain. The smaller the miner fee, the smaller the incentive. Some users prefer to have transactions added as soon as possible, while others are content to wait hours, days, or even weeks.

In short, transaction fees are how users are able to prioritize the importance of their transactions. If you want your transaction to be added to the blockchain as soon as possible, you should use a larger fee. If you aren’t in a hurry, sending with a smaller miner fee is fine and it will confirm as soon as the transactions with larger miner fees are confirmed.

If you sent a transaction with a low fee and you would like to increase it, you can use one of the fee bumping methods to increase the likelihood that a miner will add it to the next block.

Understanding transaction fees is key to understanding how Bitcoin works.

Transaction Confirmations

When a bitcoin transaction is sent, it is classified as “unconfirmed” or “pending,” along with every other unconfirmed transaction in a place called the mempool. When miners add transactions to the blockchain, they typically select the transactions with the highest fee rate. As soon as a miner adds a transaction to the blockchain, it has 1 confirmation.

Once a transaction receives its first confirmation, it will continue to receive additional confirmations as time goes on (approximately 1 every 10 minutes). As the number of confirmations for a particular transaction increases, the degree of security associated with that transaction also increases.

For smaller transactions, 1 confirmation is typically considered to be secure but for larger transactions, it’s best practice to wait for at least 6 confirmations.

Any transaction with 6 or more transactions is often deemed “immutable,” since it would take an enormous amount of energy for a group of miners to reorganize the blockchain to “delete” such a transaction.

In the event that a transaction is taking too long to confirm, either the sender or receiver is able to use one of the fee bumping methods to increase the transaction fee in an attempt to incentivize miners to confirm the transaction sooner.

Looking Up Your Transactions

If you ever want to look up any information about your transactions, you can use a block explorer. Not only can you see whether or not your transaction is confirmed, you can also view other information such as the inputs, outputs, which block your transaction is in, the miner fee, the current fee rate, and so much more.