Jonathan Emmanuel Partner Bitcoin transaction Tel +44 (0)20 7415 6052 [email protected] Bitcoin transaction from start to finish Breaking down a blockchain transaction Let’s use bitcoin as an example as it’s the most famous example of a blockchain network. First, let’s explain some of the terminology. General enables you to create transactions (e.g. I of bitcoins to send; X’s bitcoin address • A wallet stores your public and private want to send X bitcoins to Y) and digitally so people know who’s sending the X Y cryptographic keys (a string of numbers sign transactions (i.e. sign them off) before transaction and Y’s bitcoin address generated as a pair and mathematically they are broadcast to the blockchain so people know who’s receiving the related). The public key is a unique, network using a client. transaction. The transaction needs to be signed by X using his/her digital signature. TRANSACTION publicly available number and the private Clients / nodes key is private to a user. • In order to send a transaction to the • X uses a node to broadcast the signed • An account is defined by this pair of keys. network you need a client. transaction to the blockchain network. An account is operated by a user using the • A client is a piece of hardware or software • The transaction is broadcast to the relevant private key and identified on the that connects to a server. For example, blockchain and nearby nodes check the Person X blockchain network by its bitcoin address an internet browser is a client: it connects transaction is correct (has it been digitally (which is derived from the relevant public to a website’s server in order to request signed etc.) (“Transactions”). Public Private Bitcoin Bitcoin Digital key). The bitcoin address enables users QTY addresses signature its content. In blockchain, a client is • Mining nodes (miners), which are running to identify each other on the bitcoin software that connects to other clients implementations of the client that blockchain network so they can send in a peer-to-peer manner. These clients include special mining software and are bitcoins to each other (it is also referred to talk to each other, forming a network responsible for verifying transactions, as the public address). (blockchain network). That is why when collect the Transactions and compete • You will have different public keys and a client is set up and running (online and to verify them in accordance with the BROADCAST TRANSACTION private keys for each account. capable of communicating with other consensus algorithm embedded in the Node • A wallet can store multiple pairs of keys running clients) it is referred to as a client (which is called proof of work for and therefore accounts. A user can have “node” on the blockchain network (where bitcoin). multiple pairs of keys / accounts. the blockchain network is the network of • Proof of work involves miners competing nodes interacting with each other). Bitcoin QTY Bitcoin Digital to verify Transactions by solving a addresses signature Bitcoin and sending transactions • These nodes are responsible for verifying complex algorithmic problem. The miners • Bitcoin is not stored in a wallet. It is and relaying the transactions on the prove they’ve completed the work when decentrally ‘stored’ on the blockchain blockchain network but they can also act they can identify the hash that solves (the database recording the list of as end-user software that allows a user to the problem (hence the name “proof of PROOF OF WORK transactions that have taken place across create transactions and / or mine / verify work”). the blockchain network). For example, if transactions before they are added to the • Once the problem is solved the miners a transaction (X sends Y bitcoins to Z) is blockchain. validated and added to a new block on the create a block with the Transaction and blockchain then we know that Z now has • Often a client will include a wallet but the hash in it and add it to the blockchain. Y additional bitcoins and X has Y fewer sometimes they will be separate. • The blockchain is then updated with the Bitcoin QTY Bitcoin Digital addresses signature bitcoins. Bitcoin transaction from start to finish: new block and all the nodes’ copies of the • On the bitcoin blockchain network every • Let’s take the following transaction: X blockchain are updated. bitcoin is tied to a public and private key transfers bitcoin to Y. pair / account. • X logs into his wallet and selects an • The private key is your means of access account and creates the transaction. to and authority for use of any bitcoin. It The transaction includes the number Hash

Wallets • There are multiple kinds of wallets: have compatibility with various web interfaces. A hardware wallet is wallets generally work with software wallets - for example, the public »» Software wallets - applications that you can download and use on a desktop typically more secure than a software wallet as it will store your keys on the address of a user’s software wallet might receive bitcoin and then the user or mobile device, or access and use online. device, offline. may decide to transfer the bitcoin to the public address printed on the piece of paper (relating to the Paper Wallet). »» Hardware wallets - Hardware wallets store a user’s keys on a hardware »» Paper wallets - For paper wallets, private and public keys are generated device, for example a USB device like the Nano Ledger S. These wallets using a software application and are then printed on to paper. Paper twobirds.com