Cryptocurrency has shaken the entire financial world, transactions, and even data storage and transfer systems. Ever since Bitcoin appeared, the world’s first cryptocurrency, people have been finding all kinds of uses for cryptos’ underlying technology called blockchain.
To understand the key stats, features, and mechanics of the technology, it is best to start from the beginning and learn how does a simple crypto transaction work.
Step 1 – Wallets
Let’s assume two individuals, Person A and Person B, want to carry out a crypto transaction. A is trying to send a specific amount of BTC to B. To do so, both of them need to have set up a specific type of Bitcoin wallet.
Wallets are actually online storage for your funds. It is a program specifically designed to hold one or several cryptocurrencies (in our example – Bitcoin), accept payments, and send specific amounts to recipients.
There are numerous offline and online wallets that include desktop apps, mobile apps, hardware wallets (resembling USB devices), and even paper wallets.
Step 2 – Wallet address
Person A accesses her Bitcoin wallet and sets up a new transaction. Here, she will need to specify the exact amount she wants to send to B, as well as B’s public wallet address.
A public address is an alphanumeric string that distinguishes this wallet from others and can be shared to specify the destination of the transaction. In other words, it basically works the same way as you send somebody your bank account details when they want to send you money.
Ultimately, Person A authorizes the transfer by inputting her unique private key, which is a sort of password for the wallet that shouldn’t be shared with anyone for safety purposes.
Step 3 – Verification (Mining)
Once A has initiated the transfer, both parties will have to wait for the transaction to be confirmed. Depending on the cryptocurrency, it could take anywhere between a few seconds (Litecoin and Ripple, for example) and a couple of hours in the worst case scenario (Bitcoin).
First off, the pending transaction is sent to the network for confirmation. This is performed by computers that maintain the network (called “miners”), and the verification process is known as crypto mining, or simply – mining.
Step 4 – Verification
Once miners verify A’s transaction, it is added to the latest block on the Bitcoin’s blockchain. Usually, this will take around 10 minutes, depending on the number of available miners and current mining difficulty.
As we already indicated, other networks and currencies are much faster than this, but let’s be honest here; 10 minutes is nothing compared to traditional bank money transfers.
Step 5 – Closed transaction
Finally, the block is added to the blockchain, and anyone that has a copy of it (essentially, each and every computer on the Bitcoin network) will get the updated version with the new block so that no one can cheat on the technology by double-spending the same Bitcoin amount.
At this moment, person B will see new bitcoins in her wallet sent by A and is free to spend them. This completes A’s and B’s transaction.
As complex as it may seem, it is quite easy to understand this technology because of its simplicity. We are confident that you will get into it as soon as you complete your first transaction.
To find out more instructions on how to do this, check out this infographic.