Bitcoin Whiteboard Tuesday – The Path from “Send” to “Receive”

Last updated on September 21st, 2017 at 09:50 am

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 Bitcoin 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. 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 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 you’re receiving goods for a payment done in Bitcoin, 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.

Ofir Beigel

Owner at 99 Coins ltd.
Blogger and owner of 99Bitcoins. I've been dealing with Bitcoin since the beginning of 2013 and it taught me a lesson in finance that I couldn't get anywhere else on the planet. I'm not a techie, I don't understand "Hashes" and "Protocols", I designed this website with people like myself in mind. My expertise is online marketing and I've dedicated a large portion of 99Bitcoins to Bitcoin marketing.

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52 Comments on "Bitcoin Whiteboard Tuesday – The Path from “Send” to “Receive”"

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Caline
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Caline

How do I sell a portion of bitcoin and move the USDollars to my bank account?

Steven Hay
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Steven Hay

Hey Caline,

Well you simply send a fractional amount of Bitcoin from your wallet to your exchange, then you sell it for USD which you withdraw from the exchange to your bank account.

To calculate roughly how much to send, divide your desired amount by the current Bitcoin price. For example, if you want $1000 in fiat and the current BTCUSD price is $17000, you’d need to send about 0.05882353 BTC. Note that 8 is the maximum number of decimal places you can include in a Bitcoin transaction.

Richard Bergman
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Richard Bergman

Why is more than 1 confirmation needed?

Steven Hay
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Steven Hay
Hey Richard, Stevae’s answer is correct but allow me to give a bit more detail. One confirmation is proof that a miner has deemed your transaction valid and included it in a block. Under normal circumstances, the block your transaction is part becomes the tip of the blockchain. However, what can and does happen is that another block is mined at nearly the same time as “your” block – and this other block contains a different set of transactions, potentially a set in which your tx isn’t included. The blockchain forks (unintentionally) in this manner fairly often. The way these… Read more »
Richard Bergman
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Richard Bergman

But if one miner has already confirmed my transaction, why are 5 more needed to substantiate it?

Steven Hay
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Steven Hay

Well, 5 confirmations are at least 5x more secure than 1 – probably a lot higher than 5x although I couldn’t give you the exact number. Reread my answer – I know it’s a bit complicated – but that’s the long version of why it’s better to wait for more confirmations. You don’t have to, it’s just safer.

Stevae
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Stevae

Because it gives it more validity.

Mike
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Mike
Hi, I can fully understand the “process” of the earlier segments, but in trying to understand how it all fits together, I find many loose ends. Firstly, where does this “mempool” reside? How do Miners know where to go to find the transactions? How does the recipient (and the sender, for that matter) know that the transaction has been completed? It would also help if you could display what the screen looks like when processing. How do you get bitcoins into your wallet in the first place? – DO we have to go to a broker and effect a forex… Read more »
Steven Hay
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Steven Hay
Hey Mike, The mempool exists in the memory of all nodes, which is to say in the RAM of all devices running Bitcoin full nodes. Note that each device may have a different picture of the current state of unconfirmed transaction, so the mempool is a bit of a fuzzy thing. Miners see transactions which have been broadcast and select from them based mainly on transaction fees. Obviously they’ll earn more from selecting transactions which pay higher fees per byte, so those are given priority by miners. Recipients and senders know that the transaction (tx) has been completed when they… Read more »
Damien
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Damien

So does that mean u can send a transaction with no bitcoins in your wallet and if a block with that transaction in get selected will u have completeled the transaction

Steven Hay
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Steven Hay

Hi Damien,

If there aren’t any bitcoins displayed in your wallet, then it means that your private keys control no bitcoin… As such, I don’t see how you could possibly spend money you don’t have. There’s really only one way to spend bitcoins: use the private key to authorise the BTC movement from the particular address(es) linked to that privkey.

Wallets store and automate the usage of the privkey, as well as displaying the balance and history of all addresses linked to their particular privkey(s).

Barry Ian Siegel
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Barry Ian Siegel

Hello – How many transactions are confirmed before the confirmations stop?

Steven Hay
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Member
Steven Hay

Hey Barry,

The confirmations never stop! Each new block since the transaction is mined represents another confirmation that the transaction is valid. This is why you can be extremely certain of a transaction 10,000 blocks ago – without some kind of alien supercomputer, the blockchain will never get re-ordered that deep – but a transaction only 1 block “old” is a lot less certain.

Kenneth
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Kenneth

How much is a typical transaction fee on Bitcoin, say when you buy at an exchange?

Steven Hay
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Steven Hay
Hey Kenneth, OK, let’s clarify a bit first. Fees to transact from one Bitcoin address to another Bitcoin address are known as mining fees. This is because such transactions are validated by miners and they charge fees for the privilege. These fees can vary greatly, as they’re set by users. Generally speaking, higher fees will get validated by miners more quickly. This creates a fee market; fees tend to rise with transaction volume. To check the current fee situation, I recommend this website: https://bitcoinfees.earn.com/ Used in combination with a wallet that tells you the size (in bytes) of the transaction… Read more »
Kenneth
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Kenneth

Thank you, Steven, for your reply. Does this mean one type of wallet may incur a higher transaction fee than another type? Hmmm, interesting.
Ken

Steven Hay
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Member
Steven Hay
Hi Kenneth, That’s right, yes. Wallets differ greatly in their fee estimation. I believe the latest versions of Core have the best fee logic. Complex logic goes into finding the right balance between lowest possible fee and highest possible chance of timely confirmation. I’ve never had any stuck transactions from using the method described above, except when I messed up and set the fee too low by an order of magnitude. Luckily, I was using the Electrum wallet which makes it easy to “re-issue” a transaction with a too-low fee and replace it with a higher fee. That feature is… Read more »
Amitabh Bhatt
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Amitabh Bhatt

Hi, If someone can explain why should the miners be competing to validate a given transaction given the fee is nominal especially say during the infancy of any altcoin when it hardly has any value? What is the real benefit to miners to spend there time, energy and electricity?

Andrew
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Andrew

Hello, I understand that the miners write the “history book of transactions” but what happens after 21 million coins have been created, do all the miners go home? Is there no one to write the history any longer after that point?

Kenneth
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Kenneth

Hey Andrew, that is a good question. The way it was explained to me is there still will be a need for people to complete the blocks of transactions for the blockchain, even though all the bitcoins have been created. These miners will be getting paid fees to complete transactions instead of receiving a bitcoin reward.
Presently, the fees vary in amounts per transaction. In 2140, there may be a different set amount in fees associated with each transaction. This is my understanding. I hope this answered your question.

Neel Patel
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Neel Patel

Hi

Can you please recommend best please to buy Bitcoin

Zsofia Elek
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Zsofia Elek

Hi Neel, we have gathered the best exchanges on the market in an article, couple of them also have in-depth reviews, here you can find it: https://99bitcoins.com/best-bitcoin-exchanges-comparison-review/

Rajat Chadda
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Rajat Chadda

If a miner is putting my txn in a block and that reaches the destination node – isn’t that 1 confirmation? I am confused what counts as 2 or 3 or 4 … confirmations if each txn gets mined only once, gets put into a block only once, traverses the network only once, fees gets paid only once etc.

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