Bitcoin Transaction Lifecycle

Let's understand this with a simple example.

Example

Bob wants to send 1 Bitcoin to Alice.

Alice shares her Bitcoin address with Bob.

Step 1: Bob Creates the Transaction

Bob opens his Bitcoin wallet and goes to the Send Bitcoin section.

Bob does not need to worry about these technical steps. They are handled automatically by the wallet. He only needs to be connected to the internet.

Step 2: Transaction Broadcast

The Bitcoin node receives the transaction and shares it with other nodes in the Bitcoin peer-to-peer network. This process is called propagation, and within seconds the transaction spreads to thousands of nodes worldwide.

Step 3: Transaction Enters the Mempool

Once nodes verify that the transaction is valid, it is stored in a temporary waiting area called the mempool. The mempool is part of the Bitcoin software, which all miners run. This is where unconfirmed transactions wait until they are added to a block.

Step 4: Miners Pick Transactions

Miners select transactions from their mempool to include in the next block. Usually, they choose transactions that offer higher transaction fees. Bob's transaction will eventually be selected by one of the miners.

Step 5: Proof-of-Work Mining

For the transaction to be added to the blockchain, miners must solve a complex computational puzzle. This puzzle requires a lot of computer processing power.

This process is called Proof-of-Work mining.

Step 6: Block Added to the Blockchain

The winning miner broadcasts the newly created block to the network. Other Bitcoin nodes verify that the block is valid. If everything checks out, the block is added to the blockchain, and Bob's transaction becomes part of the permanent Bitcoin ledger.

Step 7: Transaction Confirmation