How a Bitcoin Transaction Process is Completed: Step-by-Step Guide

Understanding Bitcoin Transactions

Bitcoin transactions represent the core mechanism of transferring value across the decentralized network. This guide explains the structure, purpose, and execution of these transactions for both beginners and intermediate users.

Key Terminology

• Bitcoin (B): Refers to the protocol—code, nodes, and network interactions.
• bitcoin (b): The cryptocurrency exchanged via the Bitcoin network.
• Tx: Abbreviation for "Bitcoin transaction."
• TxID: Unique transaction identifier (hash) used to reference transactions.
• Script: Bitcoin’s stack-based instruction system for processing/validating transactions.
• UTXO: Unspent Transaction Output—a spendable amount locked to an address.
• Satoshi: Smallest Bitcoin unit (1 BTC = 100,000,000 satoshis).

The Anatomy of a Bitcoin Transaction

1. Definition

A Bitcoin transaction is a signed data structure broadcast to the network. If validated, it’s added to a blockchain block.

2. Purpose

To transfer ownership of bitcoin amounts to specific Bitcoin addresses.

3. How It Works

1. Creation: Your wallet constructs a transaction when sending bitcoin.
2. Broadcast: The transaction is relayed to Bitcoin nodes.
3. Validation: Nodes verify the transaction’s legitimacy.
4. Confirmation: Miners include it in a block (~10-20 minutes).

Example Transaction Structure

- TxID (Yellow Highlight)
- Metadata (Blue Brackets)
- Inputs (Pink Section)
- Outputs (Green Section)

Inputs and Outputs Explained

Core Principles

• Bitcoin is always sent to an address.
• Received amounts remain locked to their receiving address.
• Spending always uses previously received UTXOs in your wallet.
• Addresses receive bitcoin; wallets send bitcoin.

UTXOs in Practice

Received amounts aren’t merged but stay distinct. For example:

• A wallet receives 0.01 BTC, 0.2 BTC, and 3 BTC separately.
• The balance shows 3.21 BTC, but internally, it’s three independent UTXOs.

Spending Example: Sending 0.15 BTC to Bob

1. Select UTXO: Wallet chooses a 0.2 BTC UTXO as input.

2. Create Outputs:

   • 0.15 BTC to Bob’s address (new UTXO in his wallet).
   • 0.05 BTC as change (new UTXO returned to your wallet).
3. Original UTXO: Marked as "spent" and destroyed.

The Complete Transaction Lifecycle

1. UTXO Selection: Wallet picks appropriate UTXOs for the transaction amount.

2. Output Creation:

   • Receiver’s address gets the sent amount.
   • Change (if any) returns to your wallet.
3. Broadcast & Mining: Validators confirm and add the transaction to the blockchain.

👉 Learn more about Bitcoin wallets and UTXOs

FAQ Section

Q1: Why are UTXOs kept separate in a wallet?

A: UTXOs remain distinct to maintain transparency and simplify tracking. This design ensures accurate spending without merging funds.

Q2: How long does a Bitcoin transaction take?

A: Typically 10-20 minutes for one confirmation, but times vary based on network congestion and miner fees.

Q3: What happens if a transaction isn’t confirmed?

A: Unconfirmed transactions may be dropped from the mempool after a timeout. Resending with a higher fee is often necessary.

Q4: Can I spend a UTXO partially?

A: No. UTXOs are spent entirely, and any excess becomes change returned to your wallet.

Key Takeaways

• Bitcoin transactions use UTXOs as inputs to create new outputs.
• Wallets manage UTXOs separately to ensure accurate spending.
• Change outputs are fundamental to Bitcoin’s privacy and efficiency.

👉 Explore advanced Bitcoin transaction types

For deeper insights into blockchain technology, check out our curated tutorials on cryptocurrencies, Ethereum, and smart contracts.