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Bitcoin Transactions - from "Send" to "Receive" - YouTube
Channel: 99Bitcoins
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Hello guys and gals,
I'm Nate from 99Bitcoins,
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and welcome to Bitcoin Whiteboard Tuesday!
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Every few weeks weâre going to send you
a cool new video, just like this one,
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explaining some basic concepts around Bitcoin.
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This way you can learn about Bitcoin yourself
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or forward these videos to friends
or family members who have questions.
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Todayâs topic is the path of Bitcoin
from âsendâ to âreceiveâ.
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In this episode, weâre going to go over
exactly what happens to a single Bitcoin
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from the moment you hit the âsendâ button
in your wallet
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until itâs received on the other end.
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Hopefully, once we finish this lesson,
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youâll have a good understanding of
how the Bitcoin network works
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and whatâs the role of each specific player
in the Bitcoin ecosystem.
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So letâs get started!
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The path from send to receive has 3 parts:
Signing, broadcasting and confirming.
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Letâs start with the first part â signing.
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When I hit the âsendâ button in my wallet,
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what Iâm actually doing is telling my wallet:
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âHey wallet, I want to send
1 Bitcoin to my friend Steve.
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Here is Steveâs Bitcoin address.â
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The wallet, in response,
creates a transaction message
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containing information about me, the sender,
Steve, the recipient
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and the amount being sent
(in this case, one Bitcoin).
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Afterward, the wallet produces a unique
digital signature for this message
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by mathematically mixing it
with my private key.
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In our previous lesson,
Iâve discussed the concept of the private key.
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Itâs basically a long string of
letters and numbers
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that act as the âpasswordâ for your Bitcoins.
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Whoever knows my private key
has control of my Bitcoins.
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A digital signature is a way to prove that
I own the private key to my Bitcoins
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by using only my public key
which I have no issue exposing,
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thus keeping my private key, well, private.
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Also, digital signatures are different
each time you sign a transaction â
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thatâs why they are even more secure
than a real signature
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since they are unique
for each and every transaction.
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So if I send Steve one Bitcoin today
and then another Bitcoin tomorrow,
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each of these transactions will have
a different digital signature.
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After signing the transaction message,
the wallet then groups the signature,
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along with my transaction message,
into a small file.
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And this concludes our first step of signing.
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Now we can move on to
the next step â broadcasting.
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In the broadcasting step,
the wallet starts sending out the file
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to other computers that hold
a copy of the Blockchain.
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These computers are also known as nodes.
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Each node that receives the file
verifies that itâs legit.
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Itâs basically looking to see that
I actually have the funds I want to spend
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and that my signature checks out,
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much like a banker would check
your account balance
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before clearing your check.
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Once my file is verified,
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itâs then passed on to other nodes
in the network that repeat this process.
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When a node receives a file,
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it keeps it in a holding area
called the Mempool.
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The Mempool, short for memory pool,
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is a space dedicated for valid
but still unconfirmed transactions.
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Once the transaction message finds its way
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to the Mempool of the different
online nodes on the network,
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we can say the second step of broadcasting
is officially finished.
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Now I want to take a quick pause
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and talk about the status of
our transaction at this point.
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In order to actually see
whatâs going on with our transaction
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while itâs making its path
along the Bitcoin network,
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we can use a block explorer.
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A block explorer is a tool,
usually in the form of a website,
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that allows you to search
and navigate through the Blockchain.
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Using a block explorer,
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you can check the balance of
different Bitcoin addresses,
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track transactions and get a wide
variety of statistics about the network.
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So at this point,
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if we look at our transaction
through the block explorer,
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we will see that
it is marked as âunconfirmedâ,
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meaning that it was broadcasted to the network
and had its digital signature verified
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but it still isnât part of the Blockchain.
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This type of transaction
is also referred to sometimes as
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a zero confirmation transaction.
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An unconfirmed transaction should be treated
as its name implies â unconfirmed.
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This means that the transaction
can still get canceled,
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and thereâs no guarantee
it will ever enter the Blockchain.
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If your business sells or ships goods
and you accept payment in Bitcoin,
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you should never accept
an unconfirmed transaction
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as a proof of payment.
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Now we can now move on to the final step â
confirming our transaction.
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If youâve watched our previous lesson
about Bitcoin mining,
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then you already know that
miners group transactions together,
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meaning they take those files
sitting around in the Mempool,
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group them together and create
a block of transactions.
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There is a limit to how many transactions
can be inserted into each block.
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Therefore, miners will usually
pick the transactions that have
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the highest mining fees
attached to them first.
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Miners will then compete with each other
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in order to get their block
into the Blockchain.
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The mining competition
is based on mathematical calculations,
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and the miner with
the most computational power
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will have the best chance of winning.
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Once a miner wins the competition
and gets his block into the Blockchain,
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all of the transactions
that were in that block
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will be considered as confirmed.
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Basically, the miners are writing
the history book of Bitcoin transactions,
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and whoever wins the competition
gets to write the next page.
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On average, a new block of transactions
will be mined,
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or inserted into the Blockchain,
every 10 minutes.
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Keep in mind that this is on average.
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Sometimes youâll get 2 blocks
confirmed within 1 minute,
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and sometimes it can take more than an hour.
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If a block was mined
with your transaction in it,
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youâll notice it will now show
on the block explorer
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as having one confirmation.
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As more and more blocks are added afterward,
the confirmation number will grow.
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Think of it as a building of blocks
with our block at the very bottom.
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Every additional block
set on top of our own block
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makes it harder to remove.
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Thatâs why itâs usually suggested
to wait for at least 6 blocks
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before considering a transaction
as fully confirmed
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without any chance of cancellation.
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Thatâs it!
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Our transaction is now fully
confirmed and received.
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Hopefully, you now have
a better understanding
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of how the Bitcoin network operates.
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If you have any additional questions
about what we just covered,
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feel free to leave them
in the comment section below.
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I hope you enjoyed this episode of
Bitcoin Whiteboard Tuesday,
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and Iâll see you⊠in a bit.
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