The transaction lifecycle in Bitcoin involves several stages, from initiation to confirmation on the blockchain. Understanding this process is essential for anyone using Bitcoin. Here’s a detailed explanation of the transaction lifecycle:
1. Transaction Initiation
Sender’s Action: The transaction lifecycle begins when a Bitcoin user (the sender) decides to initiate a transaction. The sender uses a Bitcoin wallet to create and send the transaction.
Recipient’s Address: The sender specifies the recipient’s Bitcoin address, which is a cryptographic representation of the recipient’s wallet.
Amount: The sender specifies the amount of bitcoins they want to send to the recipient.
2. Transaction Inputs
UTXOs: The sender’s wallet identifies Unspent Transaction Outputs (UTXOs) that they own and can use as inputs for the transaction. UTXOs are previously received bitcoins that haven’t been spent yet.
Total Value: The wallet calculates the total value of the selected UTXOs, ensuring it covers the amount being sent and any transaction fees.
3. Transaction Outputs
Recipient’s Address: The sender’s wallet creates one or more outputs, specifying the recipient’s address and the amount to send to each recipient. These outputs become new UTXOs for the recipients.
Change Address: If the total value of the selected UTXOs exceeds the transaction amount and fees, the sender’s wallet generates a change address. The excess bitcoins are sent back to this address as change.
4. Transaction Fee
- Fee Calculation: To incentivize miners to include the transaction in a block, the sender may include a transaction fee. The fee is calculated based on factors like transaction size, network congestion, and desired confirmation speed.
5. Transaction Signing
Private Key: The sender’s wallet uses the sender’s private key to digitally sign the transaction. This signature proves ownership of the UTXOs being spent.
Security: The private key must be kept secure, as it provides access to the sender’s bitcoins. Only the owner of the private key can create a valid signature.
6. Transaction Broadcasting
Network Propagation: Once signed, the transaction is broadcast to the Bitcoin network. It is propagated to nodes (computers) participating in the network.
Validation: Nodes on the network validate the transaction for accuracy and adherence to Bitcoin’s rules. Invalid transactions are rejected.
7. Transaction Inclusion in a Block
Mining Process: Valid transactions are collected by miners, who group them into a block. Miners compete to solve a cryptographic puzzle (Proof of Work) to add the block to the blockchain.
Block Propagation: Once a miner solves the puzzle and adds the block to the blockchain, the new block is propagated to the entire network. This confirms the inclusion of the transaction in the blockchain.
- Block Confirmations: The transaction is considered confirmed when it is included in a block that is added to the blockchain. For most transactions, six or more confirmations are considered secure. Each subsequent block added to the chain increases the security of the transaction.
9. Transaction Finality
- Irreversible: Once a transaction is confirmed and added to the blockchain, it is irreversible. It becomes a permanent part of the public ledger, and its details are visible to all network participants.
10. Monitoring and Verification
- Transaction Status: Users can monitor the status of their transactions using blockchain explorers or wallet software. They can verify that their transaction has been confirmed and view its details on the blockchain.